Bank concentration and financial constraints on firm investment in UK

Abstract

Purpose

The purpose of this paper is to investigate the impact of bank concentration on firm financial constraints to perform investment across two types of financial constraints firms.

Design/methodology/approach

The authors analyse this relationship by estimating the investment‐cash flow sensitivity across groups of firms classified according to debt maturity structure model. The firms were classified as short‐term and long‐term debt dependent firms. Empirically the authors analyze a sample that consists of the most recent dataset (over 2001‐2009) of UK firms that engage in foreign direct investment by using fixed‐effects and GMM‐IV estimation techniques.

Findings

Bank concentration was found to relax financial constraints on firm level investment. Results indicate that higher level financial constraints are associated with short‐term debt dependent firms that exhibit high level of investment‐cash flow sensitivity. Further, it was found that bank concentration is associated with reduction in financial constraints on firm investment and this effect is stronger for short‐term debt dependent firms.

Originality/value

Unlike previous studies, the paper investigates the bank concentration effects on UK foreign direct investing firms that are uniquely classified; based on distinctive dimension of financial frictions in capital market. Estimated results ascertain that information‐based hypothesis is pertinent to the UK capital market.

Citation

Abubakr, S. and Esposito, F. (2012), "Bank concentration and financial constraints on firm investment in UK", Studies in Economics and Finance, Vol. 29 No. 1, pp. 11-25. https://doi.org/10.1108/10867371211203828