Are There Non-linear Effects of Banking Relationships and Ownership Concentration on Operational Performance? Empirical Evidence from Portuguese SMEs Using Cross-section Analysis and Panel Data

Abstract

This paper provides new evidence for the relationship between the stability of the banking relationship, ownership concentration and operating profitability, supporting non-linear effects between those variables in the context of small and medium enterprises (SMEs). From a sample of 4,163 Portuguese SMEs and cross-section data and panel data, we found evidence for a U-shaped quadratic relationship between the stability of the banking relationship and operational performance. This result indicates that the consolidation of new banking relationships, the difficulties experienced by SMEs in overcoming the problems of adverse selection and moral hazard reflect negatively on their operating profitability. However, when the banking relationship is solidified, and banking institutions acquire information, supervision and monitoring costs decrease, credit constraints are lower and contractual conditions are tailored to the needs of the company, with positive impacts on operating profitability. In turn, the quadratic specification established between ownership concentration and operating profitability suggests that the expropriation hypothesis prevails for low levels of control rights and the supervision hypothesis prevails for high levels.