Have banks filled the gap? Credit as a mechanism of corporate governance in a transition country: example of Poland

Poland, as any other transition country, suffers from inefficient corporate governance as firms have difficulties with obtaining external financing. This paper aims to examine whether bank’s involvement in corporate control reduces information asymmetries, and hence lessens firm’s financial constraints – phenomenon frequently measured by investment-cash flow sensitivity. In the sample of all non-financial companies listed during 1999-2002 on the Polish stock exchange firms with a close relationship with banks are almost as much financially constrained as firms without such ties. However, the former group relies more heavily on bank loans than on internal capital in their investment activities. In contrast, firms without a close relationship with banks finance to larger extent their investment with internal capital than with credit. It may be interpreted that bank loans are more important source of financing for firms with bank ties than for firms without bank ties.