Do Bond Issues Mitigate Hold-up Costs? Evidence from Japan's financial liberalization period
AbstractThis study is an empirical attempt to investigate whether firms' bond issues mitigate rent extraction by their banks. To that end, I focus on the cash holdings of Japanese listed firms in the early 1980s, when Japanese banks used compensation balances as a device to extract rent from their client firms. Concretely, this study examines if firms' bond issues lead to a decrease in their cash holdings. The unique feature of this study is that it exploits the eligibility for bond issues—i.e., Bond Issue Criteria—that formerly existed in Japan to address a possible endogeneity problem. Estimation results from 2SLS and an instrumental variable quantile regression model show that (1) a decline in cash holdings is accompanied by bond issues; and (2) the magnitude of decline becomes larger as the quantile of the conditional distribution of cash holding levels increases. These results imply that bond issues mitigate bank rent extraction, and that the effect is larger for firms facing severe bank power.
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Bibliographic InfoArticle provided by AccessEcon in its journal Economics Bulletin.
Volume (Year): 32 (2012)
Issue (Month): 3 ()
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Cash holdings; bank-firm relationships; corporate bonds; Bond Issue Criteria;
Other versions of this item:
- UCHINO Taisuke, 2012. "Do Bond Issues Mitigate Hold-up Costs? Evidence from Japan's financial liberalization period," Discussion papers 12046, Research Institute of Economy, Trade and Industry (RIETI).
- G3 - Financial Economics - - Corporate Finance and Governance
- G2 - Financial Economics - - Financial Institutions and Services
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- UCHINO Taisuke, 2011. "Bank Dependence and Financial Constraints on Investment: Evidence from the corporate bond market paralysis in Japan (Japanese)," Discussion Papers (Japanese) 11071, Research Institute of Economy, Trade and Industry (RIETI).
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