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Bank size and lending relationships in Japan

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  • Uchida, Hirofumi
  • Udell, Gregory F.
  • Watanabe, Wako

Abstract

Current theoretical and empirical research suggests that small banks have a comparative advantage in processing soft information and delivering relationship lending. The most comprehensive analysis of this view found using US data that smaller SMEs borrow from smaller banks and smaller banks have stronger relationships with their borrowers [Berger, A.N., Miller, N.H., Petersen, M.A., Rajan, R.G., Stein, J.C., 2005. Does function follow organizational form? Evidence from the lending practices of large and small banks. J. Finan. Econ. 76, 237-269]. We employ essentially the same methodology as Berger et al. on a unique Japanese data set and find results that are quite interesting from an international comparison point of view. We find, like Berger et al. in the US, that larger firms tend to borrow from larger banks, and that smaller banks have stronger relationships with their borrowers. However, additionally we find that the former result is not due to larger firms being more transparent in terms of their financial statements. These results imply that although small banks' comparative advantage in relationship lending is likely to be universal, large banks may not necessarily have a comparative advantage in extending transactions-based lending. J. Japanese Int. Economies 22 (2) (2008) 242-267.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 22 (2008)
Issue (Month): 2 (June)
Pages: 242-267

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Handle: RePEc:eee:jjieco:v:22:y:2008:i:2:p:242-267

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Web page: http://www.elsevier.com/locate/inca/622903

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References

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  1. Ongena, S. & Smith, D.C., 2000. "Bank relationships: A review," Open Access publications from Tilburg University urn:nbn:nl:ui:12-80678, Tilburg University.
  2. Rebel A. Cole & Lawrence G. Goldberg & Lawrence J. White, 1997. "Cookie-Cutter versus Character: The Micro Structure of Small Business Lending by Large and Small Banks," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-022, New York University, Leonard N. Stern School of Business-.
  3. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
  4. Arito Ono & Iichiro Uesugi, 2005. "The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's Small Business Loan Market," Discussion papers 05027, Research Institute of Economy, Trade and Industry (RIETI).
  5. Hirofumi Uchida & Gregory F. Udell & Wako Watanabe, 2006. "Are Trade Creditors Relationship Lenders?," Discussion papers 06026, Research Institute of Economy, Trade and Industry (RIETI).
  6. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
  7. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
  8. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  9. Berger, Allen N. & Miller, Nathan H. & Petersen, Mitchell A. & Rajan, Raghuram G. & Stein, Jeremy C., 2005. "Does function follow organizational form? Evidence from the lending practices of large and small banks," Journal of Financial Economics, Elsevier, vol. 76(2), pages 237-269, May.
  10. Jonathan Scott, 2004. "Small Business and the Value of Community Financial Institutions," Journal of Financial Services Research, Springer, vol. 25(2), pages 207-230, April.
  11. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2002. "Does Local Financial Development Matter?," CEPR Discussion Papers 3307, C.E.P.R. Discussion Papers.
  12. Hirofumi Uchida & Gregory F. Udell & Nobuyoshi Yamori, 2006. "Loan Officers and Relationship Lending," Discussion papers 06031, Research Institute of Economy, Trade and Industry (RIETI).
  13. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  14. Masaji Kano & Hirofumi Uchida & Gregory F. Udell & Wako Watanabe, 2006. "Information Verifiability, Bank Organization, Bank Competition and Bank-Borrower Relationships," Discussion papers 06003, Research Institute of Economy, Trade and Industry (RIETI).
  15. Jose M. Liberti & Atif R. Mian, 2009. "Estimating the Effect of Hierarchies on Information Use," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4057-4090, October.
  16. David Carter & James McNulty & James Verbrugge, 2004. "Do Small Banks have an Advantage in Lending? An Examination of Risk-Adjusted Yields on Business Loans at Large and Small Banks," Journal of Financial Services Research, Springer, vol. 25(2), pages 233-252, April.
  17. Stulz, Rene M. & Williamson, Rohan, 2003. "Culture, openness, and finance," Journal of Financial Economics, Elsevier, vol. 70(3), pages 313-349, December.
  18. Elyasiani, Elyas & Goldberg, Lawrence G., 2004. "Relationship lending: a survey of the literature," Journal of Economics and Business, Elsevier, vol. 56(4), pages 315-330.
  19. Hirofumi Uchida & Gregory F. Udell & Nobuyoshi Yamori, 2006. "SME financing and the choice of lending technology," Discussion papers 06025, Research Institute of Economy, Trade and Industry (RIETI).
  20. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
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