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The effect of bank monitoring on the investment behavior of Spanish firms
Institution:1. Department of Management, Universidad Publica de Navarra, Campus Arrosadia, 31006 Pamplona, Spain;2. Universidad Carlos III, Madrid, Spain;1. Department of Surgery, Section of Endocrine Surgery, Yale University School of Medicine, New Haven, CT;2. Department of Pathology, Yale University School of Medicine, New Haven, CT;1. Key Laboratory of Soil Environment Protection of Sichuan Province, Wenjiang 611130, PR China;2. College of Resources and Environment, Sichuan Agricultural University, Wenjiang 611130, PR China;3. Institute of Ecological and Environmental Sciences, Sichuan Agricultural University, Wenjiang 611130, PR China;4. Agricultural College, Sichuan Agricultural University, Wenjiang 611130, PR China;1. School of Nursing, University of California at San Francisco, San Francisco, California, USA;2. School of Medicine, University of California at San Francisco, San Francisco, California, USA;3. St. Joseph Health Medical Group, Santa Rosa, California, USA;4. School of Nursing, University of Pittsburgh, Pittsburgh, Pennsylvania, USA
Abstract:There is a large body of theoretical work that shows that information problems in the capital market have important effects on both the financial structure and the investment policy of the firm. These information problems arise when debt and equity are diffusely held and no individual investor has an incentive to monitor the firm. We test the hypothesis that banks can compensate for capital market imperfections due to asymmetric information. We find that the neoclassical investment model cannot be rejected for a sample of Spanish firms with a close bank relationship while it is rejected for the subsample made up of the remaining firms. An augmented model incorporating borrowing constraints yields the opposite results. These results suggest that banks may play a role in alleviating capital market imperfections in Spain.
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