What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm

The financial systems in continental Europe are moving from bank intermediation to intermediation by non-bank institutional investors. The present paper examines to what extent this implies a substitution of relationship finance by arm’s length finance or just of one form of relationship finance by another. Within the contractual theory of the firm, we seek common features of relationship banking and relationship investing. Extending the governance structure approach, we show that both are hybrid governance forms, whose comparative advantages depend on two kinds of asset specificity. They are complements rather than substitutes to finance and control firms with different redeployability and information opaqueness of assets.