Multiple Bank Relationship and Their Impact on Firm’s Performance: Evidence from Pakistan

Abstract

Firms always face a pressure for better performance. A lot of indicators are being studied with respect to their effect on firm’s performance. Banking sector plays a vital role in terms of financing firms for their different projects and future investments. This paper is quite significant as it is targeting the low addressed area of Pakistan. A vital contribution is made by this research in order to understand the relationship of banks and firms and how the firm’s performance is affected by number of banks in relation with firm. It further opens the new horizons of research to investigate this relationship in depth. The bank relationship is remained a topic of interest in developed countries but meagre research was done in developing and emerging markets. This paper attempts to explain the firm-bank relationship and its impact on firm’s performance with the help of OLS regression analysis with robust errors. The data for 180 listed firms is collected from Karachi Stock Exchange (KSE). We use two proxies for bank relationship. A dummy variable is used for bank relations (1 if number of bank relations is more than 5 otherwise 0) and the second variable is actual number of relations a firm is maintaining with banks. Return on asset (ROA) and return on equity (ROE) are used as dependent variables as an indicator of firm performance. It concludes that the number of bank relations do affect firm’s performance significantly but negatively. As far as the bank relation dummy is concern it shows significant relation with ROA but no such relationship with ROE. After investigating the initial relationship, it can be said that bank relations are important for firms but there must be optimal number of banking relations.