Financial Market Communication and the Creation of Trust in a Commercial Banking Relationship between Mittelstand Companies and their Banks

Abstract

The article explains the importance of good financial market communication for a company in order to achieve its financial objectives. The focus is laid upon the communication of Mittelstand (medium-sized) companies. Due to size and ownership-structure Mittelstand companies are not capital-market oriented but rather focused on the relationship with their financing banks. Based upon a literature research the principal-agent theory shall be applied to this relationship. It will be shown theoretically that the best way to achieve the company’s objectives in a relationship with a bank is the reduction of the bank’s agency costs which arise due to uncertainty of the bank being the principal in this concept if the company does not use its superior knowledge which it gains during execution of the contract for its own purposes. The information asymmetries which are perceived by the bank incur costs as the bank has to supervise if the company acts as initially agreed upon. It will be shown that the major impact of financial market communication on the reduction of agency costs is achieved by the creation of trust. Therefore, the different theoretical approaches which explain the establishment of trust will be viewed in the light of the communication measures of company with its bank.