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Bank Health and Investment: An Analysis of Unlisted Companies in Japan

  • Shin-ichi Fukuda

    (Faculty of Economics, University of Tokyo)

  • Munehisa Kasuya

    (Research and Statistics Department, The Bank of Japan)

  • Jouchi Nakajima

    (Graduate School of Economics, University of Tokyo)

To the extent that a borrower faces switching costs in a relationship with an individual bank, bank-specific financial health might affect a borrower's cost of funds. The costs would be particularly large for firms that have a close relationship with limited number of banks. The purpose of this paper is to investigate whether weakened financial conditions of banks reduced investment of small and medium firms in Japan. Estimating Tobin's Q investment functions, we examine the determinants of investment for unlisted Japanese companies in the late 1990s and the early 2000s. We find that several measures on bank-specific financial health have significantly large impacts on borrower's investment, even when observable characteristics relating to Tobin's Q, cash-flow, and leverage are controlled for. We also find that multiple banking relationships, which tend to have a negative impact on investment in general, may be beneficial in relieving a hold up problem when deteriorated bank health does matter.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-330.

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Length: 31 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:tky:fseres:2005cf330
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