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Dynamic Capital Structure of Japanese Firms: How Far Has the Reduction of Excess Leverage Progressed in Japan?

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  • Shinichi Nishioka

    (Bank of Japan)

  • Naohiko Baba

    (Bank of Japan)

Abstract

This paper investigates the dynamics of capital structure of Japanese firms since the early 1990s to shed light on how far the reduction of excess leverage has progressed so far in Japan. Our main findings are as follows. First, the trade-off theory provides an appropriate framework to assess this issue after controlling for various variables as proxies for other hypotheses including governance structure, the pecking order theory, and market timing hypothesis. Among such variables, profitability as a proxy for the pecking order theory has significant explanatory power. Second, governance structure significantly influences the speed at which firms adjust their leverage ratios toward optimal ones. In particular, the higher the shareholding ratio of overseas investors, the more quickly market-value leverage ratios adjust. Third, implied excess leverage ratios show a marked contrast between the firms in good credit standing and others. Reduction of excess leverage by highly-rated firms has substantially progressed so far, while others still have a long way to go.

Suggested Citation

  • Shinichi Nishioka & Naohiko Baba, 2004. "Dynamic Capital Structure of Japanese Firms: How Far Has the Reduction of Excess Leverage Progressed in Japan?," Bank of Japan Working Paper Series 04-E-16, Bank of Japan.
    • Handle: RePEc:boj:bojwps:04-e-16
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    Cited by:

    1. Azhagaiah Ramachandran & Veeramuthu Packkirisamy, 2010. "The Impact of Firm Size on Dividend Behaviour: A Study With Reference to Corporate Firms across Industries in India," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 8(1), pages 049-078.
    2. Kunieda, Shigeki & 國枝, 繁樹 & Takahata, Junichiro & 高畑, 純一郎 & Yada, Haruna & 矢田, 晴那, 2011. "Japanese Firms’ Debt Policy And Tax Policy," Discussion Papers 2011-11, Graduate School of Economics, Hitotsubashi University.
    3. Fuchi, Hitoshi & Muto, Ichiro & Ugai, Hiroshi, 2005. "A Historical Evaluation of Financial Accelerator Effects in Japan's Economy," MPRA Paper 4648, University Library of Munich, Germany.
    4. Voutsinas, Konstantinos & Werner, Richard A., 2011. "Credit supply and corporate capital structure: Evidence from Japan," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 320-334.

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    More about this item

    Keywords

    Capital Structure; Leverage; Trade-off Theory; Pecking Order; Corporate Governance; Market Timing; Panel Data; Dynamic GMM;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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