The Effect of the Number of Lending Banks on the Liquidity Constraints of Firms: Evidence From a Quasi-Experiment

Abstract

We empirically explore whether firms have a target for the number of banks from which they borrow, and whether having multiple bank relationships has an impact on firms’ liquidity situation. A bank merger in Chile provides a quasi-experiment as it constitutes an exogenous reduction in the number of lenders for firms that were previously borrowing from both merging banks. We find that a significant percentage of firms whose number of bank relationships was reduced by the merger regain their original number of lenders. In particular, firms whose number of bank lending relationships was reduced from two to one as a result of the merger have a 23% higher probability of adding a new bank lending relationship in the five years following the merger than similar firms unaffected by the merger. Overall, we find that a reduction in firms’ number of bank lenders resulting from the merger reduced firms’ access to credit. In particular, a reduction from two to one bank lending relationships generated, on average, a 14.4% decrease in loan size for the affected companies compared to firms unaffected by the merger.