Are SMEs locked in relationships with their banks?

Abstract

In this study, we investigate whether SMEs are locked in relationships with their banks. We combine data concerning Polish SMEs, including a survey about relationships with main banks. After estimating dynamic panel models, we find that the length of a bank-firm relationship increases firms’ interest costs, slows down investments and sales growth but is irrelevant for firms’ profitability. Therefore, our evidence supports the view that the collection of private data by a bank may “lock” a firm in the existing relationship with the bank, permit this lender to extract information monopoly rents, and force the SME to incur the so-called hold-up costs.