Bank-firm Relationships vs Financial Expenses of the Client Firm: Evidence from Developing Markets (Pakistan)

Abstract

Aiming to perform better always, the management and strategy makers of the firm feel pressure of decision making. An aspect of this strategy is to maintain the continuous and low cost of finance for the firm to excel in the industry. Banking relationships, being the main or sometimes the only source of financing, is very important for the firm. This research aims to answer the question about the number of banking relationships and their effect on firm’s financial expenditures. Our research is unique as our data set is from developing markets and most of the previous researches are focused on developed markets like U.S, Japan, and Italy etc. the data for 180 listed firms is paneled for our research from Karachi Stock Exchange. We attempt to regress the financial expenses of clients firms against our main variables (NBR, MBR) using OLS regression analysis with robust errors. Some other most commonly used variables are also used to control the effect. Our results shows significant and positive effect on financial expenses with respect to increase in number of bank relationships. This means a negative impact on the firm’s performance indirectly. Thus, the firms have to reconsider the number of banking relationship it should establish.

Keywords: Multi-bank relationship (MBR), Financial Expense, Firm Performance.