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The Impact Of Bank Health On The Investment Of Its Corporate Borrowers

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Executive Summary

This paper investigates the impact of changes in a bank's health on the investment behavior of its current borrowers for a panel of U.S. firms. The author finds that, after controlling for aggregate credit availability and the condition of outside banks, firms reduce their investment when the health of their primary bank deteriorates. Specifically, a 2% increase in the loan nonperformance of a commercial bank leads to an 8 to 10% decrease in average investment for firms which maintain a primary borrowing relationship with the bank. This effect is only present while the firm maintains a borrowing relationship with the bank and does not appear to be driven by changes in region or industry specific investment opportunities.

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