The effect of banks on the external finance behavior of firms

The second European banking directive of 1989 allows national banking markets to become more concentrated over the last decennia and allows banks to do more than just lending. These conditions form the perfect basis to investigate the effect of bank characteristics on firms' external financing and growth. Additionally, we assess the impact of the current financial crisis. The aim of the first two chapters is to examine the relationship between more concentrated banking markets and external finance behavior of firms. The first paper examines firm capital structure. Results show that more concentrated banking markets are associated with less external capital which suggest that banks use their market power. In the second paper we investigate loan characteristics such as size, maturity and spread of syndicated loans. In the syndicated loan market, more concentrated banking markets lead to lower loan spreads. However, during the financial crisis we find that more concentrated banking markets cause an increase in loan spreads which aggravates the effect of the financial crisis. In the third chapter, we examine the relationship between banks as shareholder and the performance of firms in which banks own shares. Banks are expected to be more able to control management, because they can lend to firms as well as being a shareholder. Nevertheless, we find bank ownership to reduce firm value. This result contrasts sharply with the hypothesis that banks are good monitors. It suggests that banks should focus on their core activities. Finally, we investigate the impact of bank regulation on the liquidity provisioning of banks to firms. Liquidity provisioning is one of the primary reasons for banks to exist. Moreover, the banking sector is one of the most regulated industries in the world, where bank capital plays a prominent role. Our results show that stronger supervision of bank capital results in lower liquidity provisioning. Yet, during the financial crisis stronger supervision of bank capital stimulates liquidity provisioning