Suad Husnan

Considering that bank does not always perform its functions to overcome financial constraints and to monitor the company’s financial activities, this study aims to examine the role of bank-firm relationships in the effect of internal finance on investment based on the business cycle. The testing stages started with testing the effect of internal finance on investment, testing the role of bank-firm relationships in the effect of internal finance to investment, and testing the role of bank-firm relationships based on the business cycles. Non-financial companies listed on the Indonesia Stock Exchange make the sample of this study, while the data used are the financial statements for the period of 2002 – 2015 sourced from Osiris database. Hypotheses were tested using unbalanced panel regression. The results showed that internal finance has a positive effect on investment. The bank-firm relationships play a significant role in the effect of internal finance on the investment. In the growing companies, bank-firm relationships reduce underinvestment, and in mature companies, bank-firm relationships reduce overinvestment significantly. This study implies that banks run their role in helping to meet the needs of the internal financing. Companies with strong bank-firm relationships reduce the problem of underinvestment and asymmetric information. They also reduce the problem of overinvestment and agency of free cash flow. Banks perform their role in monitoring the financing activities of the mature companies.