Financial Relations between Banks and Firms: New Evidence from Japanese Data

Abstract

This paper considers how firm-specific factors affected the financial relations between banks and firms in Japan during the period in which deregulation and reform of the financing decisions of firms were almost completed. This was also a period in which Japanese banks incurred large bad loans. Our empirical results suggest that: (i) main banks make more short-term loans to firms with smaller prospects for growth and a greater likelihood of financial distress; (ii) main banks misuse their private information for their self-interest at the expense of the other banks in bond underwriting, and (iii) main banks hold a greater number of shares of firms with smaller prospects for growth. These findings indicate that the role of main banks as a lender to firms with greater prospects for growth but a greater likelihood of financial distress is constrained. To overcome this problem, the authorities may be allowed to nationalize most of the major Japanese banks and attempt to reorganize a new banking system that promotes lending to firms with greater prospects for growth but a greater likelihood of financial distress.