How Does Public Debt Compliment the Interrelationships between Banking Relationships and Firm Profitability?

International Research Journal of Finance and Economics, Vol. 12, pp. 36-55, 2007

Posted: 6 Jul 2007 Last revised: 12 Aug 2009

See all articles by Hai-Chin Yu

Hai-Chin Yu

Chung Yuan Christian University

Anita K. Pennathur

Florida Atlantic University - College of Business

Der-Tzon Hsieh

National Taiwan University - Department of Economics

Date Written: November 1, 2007

Abstract

This study documents public debt issuance influences the interrelationships between banking relationships and firm profitability. Using a 3SLS simultaneous equation where public debt is a moderator variable and the number of banking relationships and firm performance are jointly endogenous, we find significantly negative interrelations between the number of banking relationships and firm profitability, which suggests hold-up problems are not mitigated by using multiple banking relationships. On the contrary, costs arising from the number of relationships may be substantial enough to erode profitability. We also find public debt issuance plays a significantly negative role in determining the impact of banking relationships on firm profitability. However, public debt accessing plays a significantly positive role in determining the impact of profitability on banking relationships. This implies that firms accessing public debt experience lower profits, while simultaneously fostering more banking relationships. The results are robust after controlling for the industry types. We also discuss the similarity and complementarity between public debt and multiple banking relationships. Our findings thus add to the banking relationship literature a potentially important dimension of public debt.

Keywords: Banking relationship, information disclosure, profitability, public debt

JEL Classification: G21, C41

Suggested Citation

Yu, Hai-Chin and Pennathur, Anita K. and Hsieh, Der-Tzon, How Does Public Debt Compliment the Interrelationships between Banking Relationships and Firm Profitability? (November 1, 2007). International Research Journal of Finance and Economics, Vol. 12, pp. 36-55, 2007, Available at SSRN: https://ssrn.com/abstract=996165

Hai-Chin Yu (Contact Author)

Chung Yuan Christian University ( email )

22 Pu-Jen,Pu-chung Li
Chung-Li, Taiwan 32023
Taiwan
886 3 265 5209 (Phone)
886 3 265 5299 (Fax)

Anita K. Pennathur

Florida Atlantic University - College of Business ( email )

University Tower
220 SE 2 Avenue
Fort Lauderdale, FL 33301
United States

Der-Tzon Hsieh

National Taiwan University - Department of Economics ( email )

21 Hsiu Chow Rd
Taipei, 10020
Taiwan
886 2 2397-4382 (Phone)
886 2 2397-4382 (Fax)

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