Relationship Banking, Liquidity, and Investment in the German Industrialization


  • Caroline Fohlin

    1. California Institute of Technology
    Search for more papers by this author
    • California Institute of Technology. I am grateful to Stefano Athanasoulis, Erik Berglöf, Peter Bossaerts, Lance Davis, Jeff Dubin, Barry Eichengreen, Avner Greif, David Grether, Tim Guinnane, Bronwyn Hall, Takeo Hoshi, Naomi Lamoreaux, John Latting, David Romer, Ken Sokoloff, René Stulz (the editor), Richard Tilly, Kenneth Train, Eugene White, and three anonymous referees, as well as to workshop participants at the University of California–Berkeley, University of California–Los Angeles, University of California–San Diego, Caltech, Stanford, the National Bureau of Economic Research (Cambridge), the Universities of Mannheim, M–nster, and Munich and conference participants at the All-University of California Group in Economic History (Fall 1994), the Cliometric Society (1995), the Social Science History Association (1995), and the Econometric Society Summer Meetings (1996) for helpful discussions and comments on earlier drafts. Financial support from the Joint Committee on Western Europe of the American Council of Learned Societies and the Social Science Research Council (with funds provided by the Ford and Mellon Foundations), the Center for German and European Studies at University of California–Berkeley, the Mellon Foundation Area Studies Fellowship Program, a Fulbright Research Fellowship, and the National Science Foundation (grant # SBR-9617799) is gratefully acknowledged.


Close bank relationships are thought to ameliorate firms' liquidity constraints—a phenomenon frequently measured by liquidity sensitivity of investment. Using German firms during the formative years of universal banking (1903–1913), this paper shows that, even controlling for selection bias, investment is more sensitive to internal liquidity for bank-networked firms than unattached firms. The firm exhibiting the greatest liquidity sensitivity, however, faced no apparent liquidity constraint. The findings yield two implications: they support recent research rejecting a linear relationship between liquidity sensitivity and financing constraints, and they suggest that relationship banking provides no consistent lessening of firms' liquidity sensitivity.