The Value of Concentrated Bank Relationships: Evidence from the COVID-19 Crisis

We investigate the effect of concentrated bank relationships on firms’ stock performance during the COVID-19 crisis. We show that firms with concentrated bank relationships display more resilience to liquidity shocks and recover faster than firms with diverse bank relationships. Using Japanese firm–bank matched data, we construct the measure of the concentration of bank relationships based on the loan amounts and the number of bank relationships. We find that the effect of concentrated bank relationships persists throughout 2020. Smaller firms and firms that depend on international trade benefit from concentrated bank relationships. The results are robust when we consider endogeneity and other factors, including firms’ financial flexibility (strength) and ownership structure. Our results indicate that concentrated bank relationships help mitigate information asymmetry about firms’ credit quality and display certification effects against sudden liquidity shocks.