Some of the most widely expressed myths about the German financial system are concerned with the alleged close ties and intensive interaction between banks and firms (often described as Hausbank relationships). Observers have stressed that bank-firm relationships in Germany are not only characterized by long-term debt financing commitments but also by a multitude of links. These include direct shareholdings, board representation, and proxy voting and are particularly significant for corporate

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... vernance. Specifically, it is often argued that close ties between banks and borrowers promote investment and improve the performance of firms. Second, German universal banks are believed to play a special role as large and informed investors (shareholders). However, for the very same reasons, German universal banks are frequently accused of abusing their influence on firms by exploiting rents and sustaining the entrenchment of firms against efficient transfers of firm control. In this paper, we review recent empirical evidence regarding the special role of banks for the corporate governance of German firms. We differentiate large and exchange-listed firms versus small and medium sized companies throughout. While the evidence is not that clear-cut in promoting a beneficial role of banks for large firms, most of the recent evidence regarding small firms suggests that a Hausbank relationship can indeed be beneficial. JEL Classification: G21, G32