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Why Do Firms Form New Banking Relationships?

Published online by Cambridge University Press:  07 June 2011

Radhakrishnan Gopalan ,
Gregory F. Udell  and
Vijay Yerramilli
Radhakrishnan Gopalan
Affiliation:
Olin Business School, Washington University, 1 Brookings Dr., St. Louis, MO 63130, gopalan@wustl.edu
Gregory F. Udell
Affiliation:
Kelley School of Business, Indiana University, 1309 E. 10th St., Bloomington, IN 47405, gudell@indiana.edu
Vijay Yerramilli
Affiliation:
Bauer College of Business, University of Houston, 4800 Calhoun Rd., Houston, TX 77204, vyerramilli@bauer.uh.edu
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Abstract

Using a large loan sample from 1990 to 2006, we examine why firms form new banking relationships. Small public firms that do not have existing relationships with large banks are more likely to form new banking relationships. On average, firms obtain higher loan amounts when they form new banking relationships, while small firms also experience an increase in sales growth, capital expenditure, leverage, analyst coverage, and public debt issuance subsequently. Our findings suggest that firms form new banking relationships to expand their access to credit and capital market services, and highlight an important cost of exclusive banking relationships.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 5 , October 2011 , pp. 1335 - 1365
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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