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Main Bank Relationships, Debt Structure, and Innovation in Japan

In: Encyclopedia of Finance

Author

Listed:
  • Hai-Chin Yu

    (Chung Yuan University)

  • Phuong Dung Tong

    (Corporate Finance)

Abstract

This study investigates how a firm’s debt structure and the presence of keiretsu main bank relationship conjointly shape a firm’s innovation in Japan. Using a 2SLS regression in which corporate debt structure is endogenous, we find that public debt fosters innovation, and bank debt destroys innovation. However, keiretsu main bank relationships can mitigate the negative effect of bank debt. Once a firm is affiliated with a keiretsu, the main bank relationship helps generate 1.57% (or 3.8 more patents) innovation. We explain the plausible reasons are main bank’s relationships provide more financial flexibility and risk tolerance to their affiliated firms. Besides, the ownerships of main banks held for their member firms also align the banks’ roles with acting more like shareholders than creditors. We identify the causal relation using the event of keiretsu consolidation; the DID (difference-in-differences) results show that the consolidated keiretsu raise more innovation among their member firms by 2.87% after the merger compared to the counterparts. Some further tests show the results are robust.

Suggested Citation

  • Hai-Chin Yu & Phuong Dung Tong, 2022. "Main Bank Relationships, Debt Structure, and Innovation in Japan," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 24, pages 791-818, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_114
    DOI: 10.1007/978-3-030-91231-4_114
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    More about this item

    Keywords

    Innovation; Debt structure; Bank debt; Public debt; Main bank;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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