Universal banking networks in pre-war Germany: New evidence from company financial data

Explanations for the extensive interlocking of bank and firm directorates in pre-World War I Germany have traditionally emphasized oversight and control by universal banks over their industrial clientele. The economic logic inherent in the orthodox view suggests that bank-affiliated companies should benefit from improvements in information flows as well as the good advice and guidance of bankers. Thus, attached firms would be expected to have maintained higher debt–equity ratios, profitability, and growth rates than did their independent counterparts. Using a new database of firm-level financial data to estimate discrete-choice models of the bank affiliation decision, this paper provides evidence that contradicts the standard view. The paper instead argues that externalities in the provision of underwriting and brokerage services motivated the expansive networks of interlocking directorates. The results also provide provisional evidence that proxy votes conferred on universal banks by their commercial customers played a significant role in the development of financial–industrial networks. Finally, the paper shows that, while loose connections between banks and firms were widespread, direct, exclusive relationships were rare. The findings argue for a moderate interpretation of the benefits of interlocking directorates in the later stages of German industrialization