Do Banks Influence the Capital Structure Choices of Firms?

Abstract

This paper investigates three capital structure decisions  leverage, debt maturity and the source of debt  in a simultaneous setting. Moreover, we investigate whether these choices are influenced by the involvement of banks in a firm. Our results based on a panel of Dutch firms show that bank relationships, measured by interlocking board memberships and equity ownership, have a significant impact on the relations among the three capital structure choices. First, less bank involvement strengthens the positive impact of leverage on maturity. This is consistent with the liquidity risk theory, because involved banks help firms to mitigate liquidity risk. Second, bank debt negatively effects leverage in firms with bank interlocks, while this relation is absent in firms without such bank involvement. This result suggests that banks maximize the value of their loans by reducing overall leverage. Third, we find a strong trade-off between bank debt and maturity, which is independent of the degree of bank involvement.

Keywords: capital structure, debt maturity, bank relationships, international economics, financial economics, source of debt

JEL Classification: M, M41, G3, G32, G21, F30