Main Bank Power, Switching Costs, and Firm Performance: Theory and Evidence from Ukraine

We examine firms' motivation to change their main bank and how this switch affects loans, interest payments, and firm performance. Applying treatment effect analysis to unique firm-bank matched Ukrainian data, we find that larger and more highly leveraged companies are more likely to switch their main bank. Importantly, firms tend to switch to a new main bank that holds a higher share of equity in the firm and thus has stronger power. The results also suggest that after switching, firms obtain additional access to bank loans but, on average, have lower profits due to bigger interest payments.