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Understanding the rise and decline of the Japanese main bank system: The changing effects of bank rent extraction

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  • Wu, Xueping
  • Yao, Jun
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    Abstract

    This paper shows how main bank rent extraction affects corporate decisions about investment and financing during financial regulatory reform. Our model predicts that limited loanable funds can initially contain main bank controlled overinvestment, even when new equity is available to the firm. Abundant funds facilitate overinvestment to the detriment of firm profitability. A shift of control rights back to the firm due to financial deregulation produces an “equity for upside potential and bank debt for downside risk” bias against the banks. A stock market and real estate boom in Japan made it harder than ever for the banks to diversify risk. The insights from this analysis help explain why Japan’s main bank system was beneficial in the (capital constrained) postwar period but became harmful during the (capital abundant and even bubbly) 1980s, and why the adverse shocks of the post-deregulation 1990s had such severe effects on the banking system.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 1 ()
    Pages: 36-50

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:1:p:36-50

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Financial deregulation; Main bank; Rent extraction; Investment efficiency; Bank risk;

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    References

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    Cited by:
    1. Tsuruta, Daisuke, 2012. "Changing Banking Relationships and Client Firm Performance: Evidence for Japan from the 1990s," MPRA Paper 35895, University Library of Munich, Germany.
    2. McKenzie, C.R. & Takaoka, Sumiko, 2013. "The matching of lead underwriters and issuing firms in the Japanese corporate bond market," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 93(C), pages 86-97.

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