Corporate capital structure and the influence of universal banks in pre-World War I Germany

Jahrbuch fur Wirtschaftsgeschichte

Volumn , Issue 2, 2002, Pages 113-135

  Fohlin, Caroline ^a  

^a NONE

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EID: 35448947885     PISSN: 00752800     EISSN: None     Source Type: Journal    
DOI: 10.1524/jbwg.2002.43.2.113     Document Type: Review

References (60)

1. O. Jeidels, Das Verhältnis der Deutschen Großbanken zur Industrie, Leipzig 1905, p. 145, my translation. The Great Banks were the 9 largest of the universal banks: Bank für Handel und Industrie (also known as Darmstädter Bank), Berliner Handelsgesellschaft, Commerz- und Discontobank, Deutsche Bank, Discontogesellschaft, Dresdner Bank, Mitteldeutsche Creditbank, Nationalbank fur Deutschland, and A. Schaafthausen'scher Bankverein. Some limit the list to the four D-banks (Deutsche, Dresdner, Disconto, and Darmstädter).
2. A. Gerschenkron, Economic Backwardness in historical perspective: a book of essays, Cambridge, Mass. 1962.
3. J. Riesser, Die deutschen Großbanken und ihre Konzentration, Jena 1910. [English translation: The German Great Banks and their Concentration, Washington DC 1911], makes the same point but is also clearly influenced by the work of Jeidels.
4. R. Hilferding, Das Finanzkapital, Wien 1910, argued that the banks wielded excessive control over industry.
5. More recent authors, such as A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, MA 1990,
6. R. Tilly, Banks and Industry: Lessons from History, Münster 1994,
7. C. Calomiris, The Costs of Rejecting Universal Banking: American Finance in the German Mirror, 1870-1924, in: N. Lamoreaux/D. Raff (eds.), Coordination and Information: Historical Perspectives on the Organization of Enterprise, Chicago 1995, pp. 257-321, and most others writing on the subject also emphasize this point.
8. See F.E. Lavington, The English Capital Market London 1921,
9. 21936,
10. and, in the modern context, C. Mayer, New Issues in Corporate Finance, in: European Economic Review 32, 1988, pp. 1167-88.
11. W. Feldenkirchen, Banking and Economic Growth: Banks and Industry in the Nineteenth Century and their Changing Relationship During Industrialization, in: W.R. Lee (ed.). German Industry and German Industrialisation. London 1991, pp. 116-147, p. 127.
12. V. Wellhöner, Großbanken und Großindustrie im Kaiserreich, Göttingen 1989, pp. 83-87.
13. See also G.D. Feldman, Responses to Banking Concentration in Germany, 1900-1933, Berkeley 1997,
14. H.A. Wessel, Finanzierungsprobleme in der Gründungs- und Ausbauphase der Deutsch-Österreichischen Mannesmannröhrenwerke A.G. 1890-1907, in: D. Petzina (ed.). Zur Geschichte der Unternehmensfinanzierung (= Schriften des Vereins für Sozialpolitik, Bd. 196), Berlin 1990,
15. A. Broder, Banking and the Electrotechnical Industry in Western Europe, in: V.I. Bovykin/R. Cameron (eds.). International Banking, 1870-1914, New York 1991, pp. 468-484
16. and U. Wengenroth, Iron and Steel, in: Bovykin/Cameron, pp. 485-498.
17. See the discussion in C. Fohlin, Universal Banking Networks in Pre-world War I Germany: New Evidence from Company Financial Data, in: Research in Economics 51, 1997, pp. 201-225.
18. See M. Harris/A. Raviv, The Theory of Capital Structure, in: Journal of Finance 46, 1991, pp. 297-355
19. and M. Hellwig, Banking, Financial Intermediation and Corporate Finance, in: A. Giovannini/C. Mayer (eds.), European Financial Integration, New York 1991, pp. 35-63 for reviews of this large literature.
20. Examples include S. Myers/N. Majluf, Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have, in: Journal of Financial Economics 13, 1984, pp. 187-221,
21. D. Diamond, Financial Intermediation and Delegated Monitoring, in: Review of Economic Studies 51, 1984, pp. 393-414,
22. D. Gale/M. Hellwig, Incentive-compatible Debt Contracts: the One Period Problem, in: Review of Economic Studies 52, 1985, pp. 647-63,
23. and R. Townsend, Optimal Contracts and Competitive Markets with Costly State Verification, in: Journal of Economic Theory 21, 1979, pp. 265-93
24. as well as S. Ross, The Determination of Financial Structure: The Incentive Signaling Approach, in: Bell Journal of Economics 8, 1977, pp. 23-40,
25. H. Leland/D. Pyle, Information Asymmetries, Financial Structure, and Financial Intermediation, in: Journal of Finance 32, 1977, pp. 371-388
26. and W.Y. Lee/A.V. Thakor/G. Vora, Screening, Market Signaling and Capital Structure Theory, in: Journal of Finance 38, 1983, pp. 1507-1518.
27. M. Brennan/A. Kraus, Efficient Financing under Asymmetric Information, in: Journal of Finance 42, 1987, pp. 1225-1243
28. and T. Noe, Capital Structure and Signaling Game Equilibria, in: Review of Financial Studies 1, 1988, pp. 331-356 set out models in which information asymmetry fails to generate a pecking order; thus, leaving the issue open to empirical testing.
29. M.C. Jensen/W.H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, in: Journal of Financial Economy 3, 1976, pp. 305-367,
30. S. Myers, Determinants of Corporate Borrowing, in: Journal of Financial Economics 5, 1977, pp. 146-175
31. and R. Stulz, Managerial Discretion and Optimal Financing Policies, in: Journal of Financial Economics 26, 1990, pp. 3-27.
32. R.G. Rajan, Insiders and Outsiders: The Choice Between Informed and Arm's Length Debt, in: Journal of Finance 47, 1992, pp. 1367-1400
33. and S.A. Sharpe, Asymmetric Information, Bank Lending, and Implicit Contracts: a Stylized Model of Customer Relationships, in: Journal of Finance 45, 1990, pp. 1069-1087.
34. D. Diamond, Reputation Acquisition in Debt Markets, in: Journal of Political Economy 97, 1989, pp. 828-62,
35. suggests that firms move from bank debt to marketable debt as they age, but A.N. Berger/G.F. Udell, Relationship Lending and Lines of Credit in Small Firm Finance, in: Journal of Business. 68, 1995, pp. 351-382
36. and A.N. Berger/G.F. Udell, The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle, in: Journal of Banking & Finance 22, 1998, pp. 613-675 find that U.S. public bond markets are mostly accessed by the most seasoned firms (though other types of debt still precede equity). The analysis here sheds light on these finer details of the pecking order.
37. Recent work on modern Germany - for example, Harhoff/Korting, Lending Relationships in Germany: Empirical Results from Survey Data, in: Journal of Banking & Finance 1998
38. and R. Elsas/J.P. Krahnen, Is Relationship Lending Special? Evidence from Credit-file Data in Germany, in: Institut für Kapitalmarktforschung-Center for Financial Studies 1998 - finds surprisingly little impact of banking relationships.
39. G. Gorton/F.A. Schmid, Universal Banking and the Performance of German Firms, in: Journal of Economics 2000 however, find a positive influence on market returns.
40. See also J. Cable, Capital Market Information and Industrial Performance: The Role of West German Banks, in: The Economic Journal 95, 1985, pp. 118-32.
41. Among small and medium-sized American firms in the late 1980s, M.A. Petersen/R.G. Rajan, The Benefits of Lending Relationships: Evidence from Small Business Data, in: Journal of Finance 49, 1994, pp. 3-37
42. and M.A. Petersen/R.G. Rajan, The Effect of Credit Market Competition on Lending Relationships, in: Quarterly Journal of Economics 110, 1995, pp. 407-43,
43. and D. Blackwel/D.B. Winters, Banking Relationships and the Effect of Monitoring on Loan Pricing, in: Journal of Financial Research 20, 1997, pp. 275-89 find varying degrees of improvements in credit availability and terms depending on the length of bank relationships.
44. In the Norwegian case, S. Ongena/D.C. Smith, The Duration of Banks Relationships, in: Norwegian School of Management (BI) and University of Florida, 1998 find that firms become more likely to terminate a relationship as the duration grows, and those most in need of bank financing maintain short relationships with multiple banks.
45. C. Fohlin, Relationship Banking, Liquidity, and Investment in the German Industrialization, in: Journal of Finance 53, 1998, pp. 1737-58 finds, for pre-war Germany, little impact of formal relationships on rates of investment, profitability, or liquidity sensitivity of investment.
46. For Japan, T. Hoshi/A. Kashyap/D. Scharfstein, Corporate Structure, Liquidity, and Investment in: Quarterly Journal of Economics 103, 1991, pp. 33-60 find positive effects of relationships,
47. while D.E. Weinstein/Y. Yafeh, On the Costs of a Bank-Centered Financial System: Evidence From the Changing Main Bank Relations in Japan, in: The Journal of Finance LIII, 1998, pp. 2:635-72 reveal several costs.
48. By law, German share companies had a supervisory board (Aufsichtsrat) to represent shareholder interests and an executive board (Vorstand) to manage operations. Calomiris and M. Da Rin, Understanding the Development of the German Kreditbanken 1850-1914: An Approach from the Economics of Information, in: Financial History Review 3, 1996, pp. 29-47 set out a modernized version of the traditional view on Germany.
49. See also J.B. DeLong, Did Morgan's Men Add Value?, in P. Temin (ed.), Inside Business Enterprise: Historical Perspectives on the Use of Information, Chicago 1991, pp. 205-49 on the signaling value of J. P. Morgan's men sitting on American boards.
50. See C. Fohlin, Bank Securities Holdings and Industrial Finance Before World War I: Britain and Germany Compared, in: Business and Economic History 26, 1998, pp. 463-475
51. and C. Fohlin, The Balancing Act of German Universal Banks and English Deposit Banks, 1880-1913, in: Business History, 2001 on bank securities holdings. There is very little available evidence on proxy voting by universal banks, making it exceedingly difficult to know just how pervasive the practice was.
52. This issue is quite complicated, and the evidence is mixed. See R.G. Rajan/L. Zingales, What Do We Know about Capital Structure? Some Evidence from International Data, in: Journal of Finance 50, 1995, pp. 1421-1460. They point out that the costs of long-term bank relationships may limit the amount of debt that firms are willing to take on.
53. P. Bossaerts/C. Fohlin, The Pricing of Securities Risk in a Universal Banking System: Historical Evidence from Germany, in: California Institute of Technology, Social Science Working Paper No. 1084, April 2000 find that market-to-book ratio relates positively to stock returns.
54. Handbuch der deutschen Aktien-Gesellschaften, Berlin 1905.
55. See C. Fohlin, The Rise of Interlocking Directorates in Imperial Germany, in: Economic History Review 52, 1999, pp. 307-333. The 1904 volume is also the earliest volume available in the United States. Data collection from volumes held in Germany is underway.
56. C. Fohlin, Universal Banking in Pre-World War I Germany: Model or Myth?, in: Explorations in Economic History 36, 1999, pp. 305-343
57. and Fohlin, Relationship Banking.
58. Fohlin, Universal Banking,
59. and Fohlin, The Rise, studies the characteristics of bank-attached firms in great depth. The findings of those papers are largely supported by the results here.
60. J. Edwards/K. Fischer, Banks, Finance and Investment in Germany. New York 1994 however, offer a different view.