DP1329 Investment, Liquidity Constraints and Bank Relationships: Evidence from German Manufacturing Firms

Author(s): Julie Ann Elston
Publication Date: January 1996
Keyword(s): Banks, Germany, Investment, Liquidity
JEL(s): E22, E44, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1329

This paper presents evidence supporting the theory that informational and incentive problems in capital markets affect firm investment. This hypothesis is tested by estimating investment equations for two groups of German manufacturing firms. The first group of firms are those with bank ownership, suggesting lower costs to banks of obtaining information and better access to capital for the firm. The second group contains independent firms, that are expected to face greater external financing costs and liquidity constraints. Findings support the hypothesis of greater investment sensitivity to liquidity constraints, as well as increased investment sensitivity over time, for the group of independent firms.