We examine the influence of institutional investors and banking concentration on financial constraints in 37 European countries from 2001 to 2022. Financial constraints, arising from market imperfections such as asymmetric information, affect corporate risk-taking and investment decisions. We posit that both banking concentration in performing loans and the presence of institutional investors play a central role in alleviating financial constraints. Consistent with the information hypothesis, our results show that banking concentration reduces financial constraints, with stronger effects among smaller firms, firms with medium or low credit ratings, and industries with low external finance dependence. This effect is attenuated by institutional blockholders, particularly independent ones with larger equity holdings. Contrary to evidence that institutional investors favor large, well-governed firms, we find that their direct and moderating effects are stronger in smaller firms and low external financial dependence industries. Results remain robust to heterogeneity analyses by institutional investor type and investment horizon. JEL Classification: G32; G34
Alvarez et al. (2026) studied this question.