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Does competition from new equity mitigate bank rent extraction? Insights from Japanese data

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  • Wu, Xueping
  • Sercu, Piet
  • Yao, Jun

Abstract

Previous research shows that bank information production mitigates asymmetric information problems. However, this literature has ignored the concern that firms with better growth prospects are more vulnerable to bank rent extraction. This paper points out that funding competition from new equity as an effective natural mechanism solves this important concern. Using Japanese data from 1983 to 1997, we show that the relationship between loan-to-debt ratio and growth, while starting significantly negative (consistent with holdup theory), turns significantly positive towards the high end of the growth spectrum. We confirm that high-growth firms raise more new equity than do low growth firms and use more equity relative to bonds in external finance. This is consistent with a generalized Myers-Majluf framework. These results suggest that for high growth firms, when competition from public debt lessens due to increased growth-based valuations, competition from new equity steps in to restrain bank rent extraction.

Suggested Citation

  • Wu, Xueping & Sercu, Piet & Yao, Jun, 2009. "Does competition from new equity mitigate bank rent extraction? Insights from Japanese data," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1884-1897, October.
  • Handle: RePEc:eee:jbfina:v:33:y:2009:i:10:p:1884-1897
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    2. Yee-Chy Tseng & Ching-Ping Chang & Ruey-Dang Chang & Hao-Yun Liao, 2012. "The Impact of Bankers on the Board on Corporate Dividend Policy: Evidence from an Emerging Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 192-212, January.
    3. Wu, Xueping & Au Yeung, Chau Kin, 2012. "Firm growth type and capital structure persistence," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3427-3443.
    4. Shen, Jianfu & Firth, Michael & Poon, Winnie P.H., 2016. "Credit Expansion, Corporate Finance and Overinvestment: Recent Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 16-27.
    5. Aggarwal, Raj & Goodell, John W., 2011. "International variations in expected equity premia: Role of financial architecture and governance," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3090-3100, November.
    6. Choi, Yoon K. & Han, Seung Hun, 2013. "Corporate restructuring, financial deregulation, and firm value: Evidence from Japanese “spin-ins”," Pacific-Basin Finance Journal, Elsevier, vol. 22(C), pages 1-13.
    7. Wu, Xueping & Yao, Jun, 2012. "Understanding the rise and decline of the Japanese main bank system: The changing effects of bank rent extraction," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 36-50.
    8. Tsuruta, Daisuke, 2014. "Changing banking relationships and client-firm performance: Evidence from Japan for the 1990s," Review of Financial Economics, Elsevier, vol. 23(3), pages 107-119.
    9. Yee-Chy Tseng & Ching-Ping Chang & Ruey-Dang Chang & Hao-Yun Liao, 2012. "The Impact of Bankers on the Board on Corporate Dividend Policy: Evidence from an Emerging Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 192-212, January.

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