Relationship finance by banks and non-bank institutional investors: A review within the theory of the firm

In continental Europe, banks are more and more replaced by non-bank institutional investors in the financing and control of firms. This must not imply a shift to arm's length finance, if these institutional investors develop relationships with firms similar to the traditional longterm bank-firm relationship. The present paper differentiates between relationship banking and relationship investing within the theory of the firm and compares the financial and corporate control services provided by both arrangements.