Universal Banking and the Performance of German Firms

Gary Gorton, Frank A. Schmid

NBER Working Paper No. 5453
Issued in February 1996
NBER Program(s):Corporate Finance

Universal banking is an alternative mechanism to a stock market for risk-sharing, for providing information for guiding investment, and for contesting corporate governance. In Germany, where the stock market has historically been small, banks hold equity stakes in firms and have proxy voting rights over other agents' shares. In addition, banks lend to firms and have representatives on corporate boards. If a banking relationship is a substitute for the stock market, then interaction with a bank should improve the performance of firms. But, if banks have private information about firms that they lend to and have monopolistic control over access to external capital markets, then bank interests may conflict with those of other equityholders, especially those whose shares are voted by the banks in proxy. We empirically investigate the influence of banks on the performance of German firms taking account of banks' equity holdings, the extent of banks' proxy voting rights, and the ownership structure of the firms' equity. We test for conflicts-of-interest in bank behavior and ask whether the relationship between banks and firms has changed between the 1970s and 1980s.

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Document Object Identifier (DOI): 10.3386/w5453

Published: Gorton, Gary and Frank A. Schmid. "Universal Banking And The Performance Of German Firms," Journal of Financial Economics, 2000, v58(1-2,Jan), 29-80. citation courtesy of

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