Inter-Firm Relationships and the Special Role of Common Banks

Using a novel dataset that combines information on customer-supplier trade relationships with information on firm-bank lending relationships, we show that common banks that lend to firms at both ends of a trade link strengthen such trade relationships. We use bank mergers that exogenously generate variations in common bank relationships to establish causality and show that common bank relationships between customers and suppliers increase key trade relationships by 45.2%. We argue that common banks bridge information gaps between trading partners and mitigate hold-up problems. Consistent with this hypothesis, we show that firms with a higher share of trading partners with whom they also share common banks invest more in relationship specific assets. The role of common bank is greater for more opaque supply chains and when the common bank is more informed. Lastly, we show that common banks played a central role in facilitating provision of trade credit by suppliers during the financial crisis. Overall, our findings show the unique role of banks in driving inter-firm growth.