The Prewar Financial System and the Dynamics of Corporate Financing

The literature that documents the positive association between financial development and growth raises the question, in a historical context, of whether financial systems were well developed enough to promote growth even in the early stages of economic growth. This study examines whether firms used the financial system (capital markets and financial intermediaries) for financing in the prewar period as actively as they do today. Applying the survival analysis to the financial data of Japanese listed nonfinancial firms in the 1914–1929 and 1999–2013 periods, we show that prewar firms used the financial system to meet their needs for funds equally or more actively compared with present-day firms; however, they did not use it to realize their optimal capital structures as actively as present-day firms do. Prior studies show that the Japanese financial system was well developed in the early 20th century in terms of the size of capital markets compared with the recent period. Our results related to meeting financing needs are consistent with this. However, the results related to the realization of optimal capital structure imply that the Japanese financial system was not as sophisticated in the prewar period as it is today in terms of allowing firms optimal choices between debt and equity for adjustments of capital structure.