How do bank lenders use borrowers’ financial statements? Evidence from a survey of Japanese banks

Previous studies suggest that Japanese suppliers of capital, such as main banks, have private sources of information, and thus, the quality of public accounting information may be less relevant to their decisions. Studies also indicate that the firm–bank relationship in Japan has weakened with time, potentially increasing the importance of public accounting information in the Japanese loan market. Given these contradictory results, we survey bank lenders in Japan—a bank-centered economy— and provide evidence on whether and how they use borrowers’ accounting information. Using responses from 99 Japanese banks, we examine bank lenders’ views on (1) the main bank system, (2) the use of accounting information, and (3) financial covenants. Whereas main bank lending has declined over time, nearly all respondents agreed that the main bank system is still prevalent in loan markets. Moreover, bank lenders tend to use accounting information for lending decisions and continuous monitoring purposes, prefer persistent accounting earnings tied to cash flows, and modify borrowers’ working capital conservatively. We also find that bank lenders mainly use financial covenants in syndicated loans as tripwires to obtain bargaining power in the event of borrower financial distress. The evidence complements archival studies and provides additional insights on the importance of accounting information in lenders’ practice.