The Effect of Borrowing Firms’ Financial Performance on Main Banks

Purpose] This study aims to examine how borrowing firms’ financial performances influence their main banks. [Methodology] The net incomes of borrowing firms are used to measure their financial performances, and main banks’ return on equity and discretionary loan loss provisions are used to measure their performances. [Findings] Results of this study indicate that borrowing firms influence their main banks. Specifically, we find a positive and significant relationship between borrowing firms’ net incomes and their main banks’ return on equity and a negative and significant relationship between borrowing firms’ net incomes and their main banks’ discretionary loan loss provisions. Overall, our results support relationship banking. [Implications] This study contributes to bank literature by examining how borrowing firms’ financial performances influence their main banks. Most of prior literatures have documented how main banks can influence their borrowing firms. However, this paper finds that borrowing firms can influence their main banks.