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Debt covenants in Japanese loan markets: in comparison with the traditional relationship banking

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  • Takuma Kochiyama
  • Ryosuke Nakamura

Abstract

This study investigates determinants of debt covenants in Japanese loan markets. We focus on a unique monitoring mechanism by Japanese banks and hypothesise that debt covenants substitute for the traditional main bank governance. Consistently, we find that debt covenants are less likely to be used for firms with stronger ties with their main banks. We also document that such use of debt covenants results in borrower’s upward earnings management. Overall, our evidence suggests that, in the Japanese context, debt covenants are used as a substitute for the main bank system yet they alone are an incomplete monitoring mechanism.

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  • Takuma Kochiyama & Ryosuke Nakamura, 2021. "Debt covenants in Japanese loan markets: in comparison with the traditional relationship banking," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 305-334, March.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:1:p:305-334
    DOI: 10.1111/acfi.12568
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    Cited by:

    1. Takuma Kochiyama & Ryosuke Nakamura & Akinobu Shuto, 2021. "How do bank lenders use borrowers’ financial statements? Evidence from a survey of Japanese banks," CARF F-Series CARF-F-522, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. hmed Diab & Aref M. Eissa & Samir Ibrahim Abdelazim, 2022. "Dividends Payout and Earnings Predictability: Evidence from a Developing Country," Academic Journal of Interdisciplinary Studies, Richtmann Publishing Ltd, vol. 11, September.
    3. Masaki KUSANO, 2022. "Recognition versus Disclosure and Managerial Discretion: Evidence from Japanese Pension Accounting," Discussion papers e-22-008, Graduate School of Economics , Kyoto University.

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