Bank concentration and financial constraints on firm investment in UK

Purpose - The purpose of this paper is to investigate the impact of bank concentration on firm financial constraints to perform investment across two types of financial constraints firms. Design/methodology/approach - The authors analyse this relationship by estimating the investment-cash flow sensitivity across groups of firms classified according to debt maturity structure model. The firms were classified as short-term and long-term debt dependent firms. Empirically the authors analyze a sample that consists of the most recent dataset (over 2001-2009) of UK firms that engage in foreign direct investment by using fixed-effects and GMM-IV estimation techniques. Findings - Bank concentration was found to relax financial constraints on firm level investment. Results indicate that higher level financial constraints are associated with short- term debt dependent firms that exhibit high level of investment-cash flow sensitivity. Further, it was found that bank concentration is associated with reduction in financial constraints on firm investment and this effect is stronger for short- term debt dependent firms. Originality/value - Unlike previous studies, the paper investigates the bank concentration effects on UK foreign direct investing firms that are uniquely classified; based on distinctive dimension of financial frictions in capital market. Estimated results ascertain that information-based hypothesis is pertinent to the UK capital market.