These data summarize the financial condition of more than 1,000,000 proprietorships, partnerships and corporations in the United States. To our surprise, we did not find strong support for the predominant view that banks provide loans to firms where problems of monitoring and verification of project quality between insiders and outsiders are greatest. Bank debt as a percentage of all liabilities is somewhat greater for these larger firms with a high proportion on non-collateralizable intangible assets. Our results are more consistent with the view that banks can overcome informational problems by building relationships with firms, but that these same relationships may become onerous and prevent managers from pursuing growth opportunities. Also consistent with the idea that banks build relationships with firms only when they can be assured that such relationships are largely exclusive, we find that bank borrowing is greatest among firms with relatively little debt in their capital structures.
Banks lend far less to firms which are heavily indebted, especially when they are small.
One of the important implications of our study is that credit managers and bank relationship managers need to be cognizant of the impact of decisions to drop bank relationships. Given that bank loans are most likely to be made when a firm has built a good track record with a relationship, it is important to maintain the relationship even in cases when cheaper sources of capital may be available. This holds even for firms with some access to debt in the public market. The public bond market and the market for private placements seems to tighten more frequently than bank debt markets. In 1989, adverse news in the junk debt market, for example, led to conditions where a number of mid-sized firms were not able to obtain credit at any cost.