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Atlanta Fed Working Papers


Bank Relationships and Small Firms’ Financial Performance

Annalisa Castelli, Gerald P. Dwyer Jr., and Iftekhar Hasan
Working Paper 2006-5
May 2006

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We examine the relationship between the number of bank relationships and firms’ performance, evaluating possible differential effects related to firms’ size. Our sample of firms from Italy includes many small firms, 99 percent of which are not listed and for which bank debt is a major source of financing. In the sample, 4 percent of the firms have a single bank relationship, and 66 percent of them have five or fewer relationships. We find that return on equity and return on assets decrease as the number of bank relationships increases, with a stronger relationship for small firms than for large firms. We also find that interest expense over assets increases as the number of relationships increases. Particularly for small firms, our results are consistent with analyses indicating that fewer bank relationships reduce information asymmetries and agency problems, which outweigh negative effects connected to holdup problems.

JEL classification: D21, G21, G32

Key words: bank relationships, small business lending, firms’ performance


Annalisa Castelli and Iftekhar Hasan thank the Federal Reserve Bank of Atlanta for research support. Linda Mundy provided editorial assistance. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Annalisa Castelli, Research Associate, Department of Economics, University of Rome Tor Vergata, Via Columbia, 2, 00133 Rome, Italy; 39 06 72595714, 39 06 2020500 (fax), annalisa.castelli@uniroma2.it; Gerald P. Dwyer Jr., Vice President, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309, 404-498-7095, 404-498-8810 (fax), gerald.p.dwyer@atl.frb.org; or Iftekhar Hasan, Cary L. Wellington Professor, Director of the Center for Financial Technology, and Area Coordinator, Rensselaer Polytechnic Institute, 110 8th Street, Pittsburgh Building, Troy, NY 12180, 518-276-2525, 518-276-8661 (fax), hasan@rpi.edu.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.