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Do Bond Issues Mitigate Hold-up Costs? Evidence from Japan's financial liberalization period

Author

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  • Taisuke Uchino

    () (Faculty of Economics, Daito Bunka University)

Abstract

This study is an empirical attempt to investigate whether firms' bond issues mitigate rent extraction by their banks. To that end, I focus on the cash holdings of Japanese listed firms in the early 1980s, when Japanese banks used compensation balances as a device to extract rent from their client firms. Concretely, this study examines if firms' bond issues lead to a decrease in their cash holdings. The unique feature of this study is that it exploits the eligibility for bond issues—i.e., Bond Issue Criteria—that formerly existed in Japan to address a possible endogeneity problem. Estimation results from 2SLS and an instrumental variable quantile regression model show that (1) a decline in cash holdings is accompanied by bond issues; and (2) the magnitude of decline becomes larger as the quantile of the conditional distribution of cash holding levels increases. These results imply that bond issues mitigate bank rent extraction, and that the effect is larger for firms facing severe bank power.

Suggested Citation

  • Taisuke Uchino, 2012. "Do Bond Issues Mitigate Hold-up Costs? Evidence from Japan's financial liberalization period," Economics Bulletin, AccessEcon, vol. 32(3), pages 2085-2102.
  • Handle: RePEc:ebl:ecbull:eb-12-00502
    as

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    References listed on IDEAS

    as
    1. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1993. "The Choice Between Public and Private Debt: An Analysis of Post-Deregulation Corporate Financing in Japan," NBER Working Papers 4421, National Bureau of Economic Research, Inc.
    2. UCHINO Taisuke, 2011. "Bank Dependence and Financial Constraints on Investment: Evidence from the corporate bond market paralysis in Japan (Japanese)," Discussion Papers (Japanese) 11071, Research Institute of Economy, Trade and Industry (RIETI).
    3. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, September.
    4. Hale, Galina & Santos, João A.C., 2009. "Do banks price their informational monopoly?," Journal of Financial Economics, Elsevier, vol. 93(2), pages 185-206, August.
    5. Vasso Ioannidou & Steven Ongena, 2010. "“Time for a Change”: Loan Conditions and Bank Behavior when Firms Switch Banks," Journal of Finance, American Finance Association, vol. 65(5), pages 1847-1877, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cash holdings; bank-firm relationships; corporate bonds; Bond Issue Criteria;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G2 - Financial Economics - - Financial Institutions and Services

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