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Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships

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  • Takeo Hoshi
  • Anil Kashyap
  • David Scharfstein

Abstract

During this decade the structure of corporate finance in Japan has changed dramatically. Japanese firms that once used bank debt as their prime source of financing now rely more heavily on the public capital markets. This trend was facilitated by the substantial deregulation of the Japanese capital markets. In an earlier paper (Moshi, Kashyap, and Scharfstein 1988). we demonstrated that investment by firms with close bank relationships appears to be less liquidity constrained than investment by firms without close bank ties. We interpreted this finding as evidence that bank ties tend to mitigate information problems in the capital market. This paper tracks the investment behavior of firms that have recently weakened their bank ties in favor of greater reliance on the bond market. The results suggest that these firms are now more liquidity constrained. The paper concludes with a discussion of why firms would loosen their bank ties in light of these liquidity costs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3079.

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Date of creation: Aug 1989
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Publication status: published as Takeo Hoshi, Anil Kashyap, David Scharfstein. "Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships," in R. Glenn Hubbard, editor, "Asymmetric Information, Corporate Finance, and Investment" University of Chicago Press, 1990 (1990)
Handle: RePEc:nbr:nberwo:3079

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  1. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  2. Jeffrey K. MacKie-Mason, 1989. "Do Firms Care Who Provides their Financing?," NBER Working Papers 3039, National Bureau of Economic Research, Inc.
  3. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
  4. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
  5. Schiantarelli, F. & Georgoutsos, D., 1990. "Monopolistic competition and the Q theory of investment," European Economic Review, Elsevier, vol. 34(5), pages 1061-1078, July.
  6. Hodder, James E. & Tschoegl, Adrian E., 1985. "Some Aspects of Japanese Corporate Finance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(02), pages 173-191, June.
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