Bank Relationships and Their Effects On Firm Performance Around the Asian Financial Crisis: Evidence From Taiwan

Summary

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We evaluate the impact of bank relationships on firm performance for a sample of Taiwanese firms around the 1997 Asian financial crisis. We find a negative relation between the number of domestic-bank relationships and firm performance, but a positive relation between the number of foreign-bank relationships and firm performance. Firms explored new relationships with domestic banks and reduced their reliance on foreign banks during the crisis. Lending bank reputation and bank loan ratios are important factors explaining firm performance. Factors that affect banking relationships include borrowing firms' profitability, age, size, and leverage, and the primary lending bank's characteristics.

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Bank Relationships and Their Effects On Firm Performance Around the Asian Financial Crisis: Evidence From Taiwan

Although worldwide financial deregulation and disintermediation have created a new environment for commercial banking, bank financing remains important in emerging markets. Yet, very few studies examine the effect of bank relationships on firm performance in developing countries.

We try to fill this gap by examining bank relationships in one emerging market in Asia. We differentiate the impacts of foreign- and domestic-bank relationships on firm performance, and investigate whether the relation between bank relationships and firm performance changed during a particular financial crisis.

As Claessens, Djankov, and Lang (1998) report, firm financial structures and legal systems in East Asia are very different from those in developed countries. A study on the choices of single-or multiple-bank relationships and the number of bank relationships in Asian markets is warranted.

Studies analyzing the impact of foreign bank entities use mainly bank-level data (Berger, Klapper, and Udell, 2001, Claessens, Demirguc-Kunt, and Huizinga, 2001, and Clarke, Cull, Peria, and Sanchez, 2001). These studies examine the effect of a foreign bank entity on the host country's economy and banking system, and the availability of credit to small businesses. We use firm-level data to analyze the impact of foreign-bank relationships from a different perspective. We also examine whether the impact of foreign-bank relationships on local firm performance changed during the 1997 Asian financial crisis.

We analyze a sample of Taiwanese firms for changes in lending relationships. We find a significant shift in firms' number of bank relationships during the Asian financial crisis. The number of foreign-bank relationships declined, while the number of domestic-bank relationships rose. The bank loans-to-total loan ratio dropped during the crisis, as the proportion of domestic (foreign) bank loans rose (dropped). This finding indicates that firms are more closely related to domestic banks in a time of financial difficulty. Foreign-bank and domestic-bank relationships have different effects on firm performance. Firm performance improves as the number of foreign-bank relationships increases, but worsens as the number of domestic-bank relationships increases.

There is no significant association between the choices of single- or multiple-bank relationships and firm performance, but we find a negative association between firm performance and the percentage of bank loans. Bank reputation exhibits a significant and positive relati...

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