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Bank size and lending relationships in Japan

In: Organizational Innovation and Firm Performance

  • Hirofumi Uchida
  • Gregory F. Udell
  • Wako Watanabe

Current theoretical and empirical research suggests that small banks have a comparative advantage in processing soft information and delivering relationship lending. The most comprehensive analysis of this view found using US data that smaller SMEs borrow from smaller banks and smaller banks have stronger relationships with their borrowers [Berger, A.N., Miller, N.H., Petersen, M.A., Rajan, R.G., Stein, J.C., 2005. Does function follow organizational form? Evidence from the lending practices of large and small banks. J. Finan. Econ. 76, 237-269]. We employ essentially the same methodology as Berger et al. on a unique Japanese data set and find results that are quite interesting from an international comparison point of view. We find, like Berger et al. in the US, that larger firms tend to borrow from larger banks, and that smaller banks have stronger relationships with their borrowers. However, additionally we find that the former result is not due to larger firms being more transparent in terms of their financial statements. These results imply that although small banks' comparative advantage in relationship lending is likely to be universal, large banks may not necessarily have a comparative advantage in extending transactions-based lending. J. Japanese Int. Economies 22 (2) (2008) 242-267.

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This chapter was published in:
  • George Baker & Takeo Hoshi & Hideshi Itoh & Sadao Nagaoka, 2008. "Organizational Innovation and Firm Performance," NBER Books, National Bureau of Economic Research, Inc, number bake08-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12176.
    Handle: RePEc:nbr:nberch:12176
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Jonathan Scott, 2004. "Small Business and the Value of Community Financial Institutions," Journal of Financial Services Research, Springer, vol. 25(2), pages 207-230, April.
    2. Rene M. Stulz & Rohan Williamson, 2001. "Culture, Openness, and Finance," NBER Working Papers 8222, National Bureau of Economic Research, Inc.
    3. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
    4. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "Does Local Financial Development Matter?," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 929-969, August.
    5. Hirofumi Uchida & Gregory F. Udell & Nobuyoshi Yamori, 2006. "Loan Officers and Relationship Lending," Discussion papers 06031, Research Institute of Economy, Trade and Industry (RIETI).
    6. Kano, Masaji & Uchida, Hirofumi & Udell, Gregory F. & Watanabe, Wako, 2011. "Information verifiability, bank organization, bank competition and bank-borrower relationships," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 935-954, April.
    7. Takeo Hoshi & Anil Kashyap, 2004. "Corporate Financing and Governance in Japan: The Road to the Future," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582481, June.
    8. Uchida, Hirofumi & Udell, Gregory F. & Watanabe, Wako, 2013. "Are trade creditors relationship lenders?," Japan and the World Economy, Elsevier, vol. 25, pages 24-38.
    9. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks," NBER Working Papers 8752, National Bureau of Economic Research, Inc.
    10. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    11. Ongena, S. & Smith, D.C., 2000. "Bank relationships : A review," Other publications TiSEM 993b88a5-9a0f-42de-9cec-6, Tilburg University, School of Economics and Management.
    12. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    13. Rebel A. Cole & Lawrence G. Goldberg & Lawrence J. White, 1999. "Cookie-cutter versus character: the micro structure of small business lending by large and small banks," Proceedings 777, Federal Reserve Bank of Chicago.
    14. Jose M. Liberti & Atif R. Mian, 2009. "Estimating the Effect of Hierarchies on Information Use," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4057-4090, October.
    15. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
    16. Elyasiani, Elyas & Goldberg, Lawrence G., 2004. "Relationship lending: a survey of the literature," Journal of Economics and Business, Elsevier, vol. 56(4), pages 315-330.
    17. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    18. David Carter & James McNulty & James Verbrugge, 2004. "Do Small Banks have an Advantage in Lending? An Examination of Risk-Adjusted Yields on Business Loans at Large and Small Banks," Journal of Financial Services Research, Springer, vol. 25(2), pages 233-252, April.
    19. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
    20. Arito Ono & Iichiro Uesugi, 2005. "The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's Small Business Loan Market," Discussion papers 05027, Research Institute of Economy, Trade and Industry (RIETI).
    21. Hirofumi Uchida & Gregory F. Udell & Nobuyoshi Yamori, 2006. "SME financing and the choice of lending technology," Discussion papers 06025, Research Institute of Economy, Trade and Industry (RIETI).
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