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Bank ties and bond market access: evidence on investment-cash flow sensitivity in Japan

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  • Patrick M. McGuire

Abstract

The banking literature has established that banks can alleviate information asymmetries between lenders and borrowers, while the Q literature has used cash flow sensitivity analysis to test whether financing constraints hinder investment. Building on the results in Hoshi, Kashyap and Scharfstein (1991) and Hayashi (2000), this paper investigates whether bank ties in Japan were costly for mature and healthy firms in the 1980s and 1990s and whether banks continued to facilitate investment once non-bank financing options became available. Using the explicit bond issuing criteria to solve the endogenous firm sorting problem, I measure the investment-cash flow sensitivity of Japanese firms, and find it lowest for those firms known to have faced bond market constraints. I then find that the spread in sensitivity was much larger for main bank client firms, once bond market access is controlled for. This result, coupled with results on the relative profitability and bond activity of bank-affiliated firms, is consistent with banks capturing the net benefits of relationship lending during the period of bond market deregulation.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 151.

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Length: 52 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:bis:biswps:151

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Keywords: Japan; Bank ties and bond market access; investment-cash flow sensitivity;

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References

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  1. R. Glenn Hubbard, 1990. "Asymmetric Information, Corporate Finance, and Investment," NBER Books, National Bureau of Economic Research, Inc, number glen90-1, October.
  2. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 33-60, February.
  3. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 105-126 National Bureau of Economic Research, Inc.
  4. Miwa, Yoshiro & Ramseyer, J. Mark, 2006. "The Fable of the Keiretsu," University of Chicago Press Economics Books, University of Chicago Press, edition 0, number 9780226532707, March.
  5. Toshitaka Sekine, 1999. "Firm Investment and Balance-Sheet Problems in Japan," IMF Working Papers 99/111, International Monetary Fund.
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Cited by:
  1. Adam Posen, 2003. "It Takes More Than a Bubble to Become Japan," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  2. Espenlaub, Susanne & Khurshed, Arif & Sitthipongpanich, Thitima, 2012. "Bank connections, corporate investment and crisis," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1336-1353.
  3. Yoshiro Miwa & J. Mark Ramseyer, 2003. "Does Relationship Banking Matter? Japanese Bank-Borrower Ties in Good Times and Bad," CIRJE F-Series CIRJE-F-239, CIRJE, Faculty of Economics, University of Tokyo.
  4. Harada, Nobuyuki & Honjo, Yuji, 2005. "Does the Creative Business Promotion Law enhance SMEs' capital investments? Evidence from a panel dataset of unlisted SMEs in Japan," Japan and the World Economy, Elsevier, vol. 17(4), pages 395-406, December.
  5. repec:hal:cesptp:halshs-00085680 is not listed on IDEAS
  6. Laurent Soulat, 2006. "Les modèles Q-investment et les modèles d'Euler : relations de banque principale, asymétries informationnelles et modifications des structures financières des firmes de keiretsu financier," Cahiers de la Maison des Sciences Economiques bla06010, Université Panthéon-Sorbonne (Paris 1).
  7. Slomka, Agnieszka, 2005. "Have banks filled the gap? Credit as a mechanism of corporate governance in a transition country: example of Poland," MPRA Paper 642, University Library of Munich, Germany.

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