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Relational Financing as an Institution and its Viability under Competition

  • Masahiko Aoki
  • Serdar Dinc

May 20, 1997 This paper presents a new, generic definition of relational financing that may cover a wide range of financial practices in different economies, ranging from the Japanese main bank relationship, to bank lending to smaller firms, and venture capital in the U.S. It then discusses various incentives of the financier to commit to relational financing and reviews the recent literature on issues about how those incentives are affected by increasing competition. One useful insight is that increasing competition is not necessarily harmful to relational financing. It then applies theoretical insights to problems of institutional transition in two Asian economies. It argues that the Japanese financial system will retain some aspects of relational financing even after the impending financial deregulation, although there will be a significant reduction in the bank's role in corporate governance. Finally, it assesses that the ongoing experiment of main bank relationship in China may be one of viable financial options for successful transition of the planned economy to a market economy, but cautions that more competition in the banking sector is necessary for relational banking to emerge as an institution.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 97011.

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Date of creation: 20 May 1997
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Handle: RePEc:wop:stanec:97011
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  1. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  2. Masahiko Aoki, 2013. "Toward an Economic Model of the Japanese Firm," Chapters, in: Comparative Institutional Analysis, chapter 18, pages 315-341 Edward Elgar.
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  8. George W. Fenn & Nellie Liang & Stephen Prowse, 1995. "The economics of the private equity market," Staff Studies 168, Board of Governors of the Federal Reserve System (U.S.).
  9. 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.
  10. Boot, Arnoud W A & Greenbaum, Stuart I & Thakor, Anjan V, 1993. "Reputation and Discretion in Financial Contracting," American Economic Review, American Economic Association, vol. 83(5), pages 1165-83, December.
  11. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June.
  12. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
  13. Gibson, Michael S, 1995. "Can Bank Health Affect Investment? Evidence from Japan," The Journal of Business, University of Chicago Press, vol. 68(3), pages 281-308, July.
  14. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
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