This paper examines whether financial constraints affect firms’ investment decisions for older
(larger) firms. We compare a group of unbanked firms to firms that rely on formal financing.
Specifically, we combine data from the Spanish Mercantile Registry and the Bank of Spain
Credit Registry (CIR) to classify firms according to their number of banking relations: one,
several, or none. Our empirical strategy combines two approaches based on a common
theoretical model. First, using a standard Euler equation adjustment cost approach to
investment, we find that single-banked firms in our sample are most likely to exhibit cash
flow sensitivity while unbanked firms are not. Second, using structural maximum likelihood
estimation, we find that unbanked firms have a financial structure which is close to credit
subject to moral hazard with unobserved effort, whereas single-banked firms have a financial
structure which is more limited, as in an exogenously imposed traditional debt model.
Firms in the unbanked category do not rely on bonds, equity, or formal financial markets,
but rather on other firms in a financial or family-tied group (with either pyramidal or informal
structure). We are among the first to document the importance of such groups in a
European country. We control for reverse causality by treating bank relationships as
endogenous and/or by appropriate stratifications of the sample.