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Firm age and the evolution of borrowing costs: Evidence from Japanese small firms

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Listed author(s):
  • Sakai, Koji
  • Uesugi, Iichiro
  • Watanabe, Tsutomu

Abstract

This paper investigates how firms' borrowing costs evolve as they age. Using a new panel data set of about 100,000 bank-dependent small firms for 1997-2002 and focusing on the channel of "adaptation" (i.e., surviving firms' borrowing costs decline as they age) and that of "selection" (i.e., total borrowing costs decline as defaulting firms exit), we find that the reputation hypothesis suggested by Diamond (1989) provides a more plausible explanation of the downward sloping age profile of borrowing costs than the firm dynamics (Cooley and Quadrini, 2001) or the relationship banking (Boot and Thakor, 1994) hypothesis. In addition, we examine whether the firm selection process in Japan has been natural or unnatural. Our findings suggest that it has been natural in that firms with lower quality are separated, face higher borrowing costs, and are eventually forced to exit, which contrasts with the results of previous studies on credit allocations in Japan, including Peek and Rosengren (2005). Further, we find that the evolution of borrowing costs is partially due to selection but is mainly attributable to adaptation.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 8 (August)
Pages: 1970-1981

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:8:p:1970-1981
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

Keywords: Credit allocation Reputation Selection Relationship banking Firm dynamics;

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Find related papers by JEL classification:
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
  • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
  • G30 - Financial Economics - - Corporate Finance and Governance - - - General
  • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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