R&D Expenditure and The Choice between Private and Public Debt --Do the Japanese Main Banks Extract the Firm's Rents?

Using Japanese firm data in the machinery industry over 1987 through 1996, we found that the ratio of bank loan to debt is negatively related to R&D expenditure, profitability and size. We also found that the close relationship with the main bank, measured by its loan share and the transfer of directors, increases bank loan and decreases R&D. The negative relationship between R&D and bank loan suggests that the problem of information disclosure via capital market, as stressed by Yosha (1995) and others, is not relevant for the listed machinery companies in Japan. Our results do not support the theories, either, which focus only on the positive role of bank loan in reducing the agency costs of debt. Instead, they suggest the relevancy of the theory that stresses the costs of bank monitoring and their effects on the borrower's incentive, such as Diamond (1991) and Rajan (1992). Our reslts suggest that the main banks have not exacerbated the banks' rent extraction, but rather either alleviated them or reduced the monitoring costs.