How Firms Capitalize on Social Assets
Chapter 3: The Impact of Social Capital on Firm–Bank Relationships
The aim of this chapter is to explore whether and how geographically bound social capital shapes firm banking relationships. Specifically, it focuses on two important aspects that describe banking relationships: relationship banking and maturity of the loan. Relationship banking can be defined as ‘an implicit long-term contract between a bank and its debtor’ (Elsas, 2005: 34), which in turn implies repeated interactions among the agents and which enables the bank to closely monitor firms and have access to specific information that is not publicly available (Boot, 2000; Diamond, 1991a). The maturity of the loan is determined upon the amount of information the lender has about the borrower, being it the discriminating factor of its creditworthiness. In principle, firms take advantage of relationship banking and long debt maturity because they imply easier access to credit and lower financing cost. Nonetheless, most of the time asymmetric information problems prevent their wider use, with the result that the common practice is to have multiple banking relationships and short-term debt (Detragiache et al., 2000; Ongena and Smith, 2000b). Previous research acknowledges that the firm’s context plays a crucial role in defining an efficient system of banking relationships. Specifically, Detragiache et al. (2000) and Ongena and Smith (2000b) relate the number of banking relationships to the efficiency of the judicial system and the strength of enforcement of creditors’ rights: it turns out that firms forge a higher number of banking relationships when the judicial system is inefficient and when bankruptcy law protects firms’ managers rather...
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