Multiple banking relationships, managerial ownership concentration and firm value: A simultaneous equations approach

► Endogeneity between the number of banks, managerial ownership and firm performance. ► Bank monitoring has substantial value when managers are improperly incentivized. ► Substitution effect between the impact of managerial ownership and bank monitoring. ► Free riding problem is problematical only when Q and managerial ownership are high. This paper examines how the number of banking relationships affects the interaction between managerial ownership and firm performance, and sheds light on the conditions under which banking relationships play a role in alleviating shareholder–manager conflicts. Our results provide several interesting insights. We document that bank monitoring has substantial value when managers are improperly incentivized, but that it becomes less important when managers are properly incentivized. There is a substitution effect between the value-increasing benefits of managerial ownership and bank monitoring. We also find that any existing free-riding concerns from having too many banking relationships are problematical only when Tobin's Q is high and managerial ownership is high.