The Japanese "main bank" relationship, under which a bank holds equity in a firm and plays a leading role in its decision-making and financing, may leave a firm dependent on its main bank for financing due its information advantage over other potential lenders. While alternative sources of finance may mitigate this dependency, it may resurface during episodes of financial turbulence. ; We examine the sensitivity of returns on portfolios of Japanese firm equity to the returns of their main banks using a three-factor arbitrage-pricing model. We find no significant dependence on main bank returns when coefficient values are constrained to remain constant over the entire sample. However, the data strongly suggest a structural break subsequent to the last quarter of 1997, a turbulent period for Japanese financial markets. When a structural break is introduced, main bank sensitivity increases after the break, usually to significantly positive levels.
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