Firm Financing and Performance

The historical and theoretical literature offers many hypotheses about the potential advantages of corporate banking systems that provide a wide range of services and build formal relationships with clients. The historical literature on Germany places particular emphasis on the representation of bankers in corporate supervisory boards, and the theoretical literature rationalizes such relationships. Indeed, from a theoretical perspective, the existence of relationship banking may affect firm financing in myriad ways. The preceding two chapters, however, raise a number of doubts about both the traditional emphasis on formalized banking relationships and some of the theoretical explanations for these links. Bank board memberships could not have been prevalent until the last quarter of the nineteenth century, when the joint-stock form (and therefore the institution of the supervisory board) began to spread. Informal precursors to interlocking directorates, while possibly important, are neither unique to the German system nor traceable in any comprehensive or quantitative way. Even once interlocking directorates became more common, the majority of firms had no representation from the joint-stock universal banks, and the largest of those banks – the great banks – were nearly absent from many sectors of the economy. In addition, the reasons typically proffered for the formation of bank relationships – especially those having to do with monitoring debt, signaling firm quality, or providing consultancy services – find little support in the historical record. If the causes of interlocking directorates differ from the received wisdom, perhaps the consequences do as well.