How Does Public Debt Compliment the Interrelationships between Banking Relationships and Firm Profitability?

This study documents public debt issuance influences the interrelationships between banking relationships and firm profitability. Using a 3SLS simultaneous equation where public debt is a moderator variable and the number of banking relationships and firm performance are jointly endogenous, we find significantly negative interrelations between the number of banking relationships and firm profitability, which suggests hold-up problems are not mitigated by using multiple banking relationships. On the contrary, costs arising from the number of relationships may be substantial enough to erode profitability. We also find public debt issuance plays a significantly negative role in determining the impact of banking relationships on firm profitability. However, public debt accessing plays a significantly positive role in determining the impact of profitability on banking relationships. This implies that firms accessing public debt experience lower profits, while simultaneously fostering more banking relationships. The results are robust after controlling for the industry types. We also discuss the similarity and complementarity between public debt and multiple banking relationships. Our findings thus add to the banking relationship literature a potentially important dimension of public debt