Banking relationship, relative leverage and stock returns in Japan

Min Teng, Jiwen Si and Toyohiko Hachiya

Pacific-Basin Finance Journal, 2016, vol. 40, issue PA, 86-101

Abstract: This paper revisits the leverage-return puzzle and examines how bank debts affect returns, considering the dynamic nature and heterogeneity of capital structure. We employ relative leverage, the difference between observed and target leverage, in our analysis, and find that returns are positively related to leverage. Relative leverage, rather than observed leverage, provides great explanatory power for returns. Since bank debts are part of the total leverage, we examine how the relative leverage of bank debts affects returns and find a positive and strong relation between the relative leverage of bank debts and returns. The positive relations can be partly explained in that the relative components negatively predict future asset growth, and contain substantial information about future risk. A close banking relationship reduces the financial distress costs of firms. However, very close ties to banks may allow banks to restrict their client firms' investments and to siphon their profits through interest payments. But, during the 1990s crisis, banks had an incentive to evergreen loans to troubled client firms, and a close banking relationship established through high bank borrowing appears to mitigate financial distress and deter further falls in the share prices of troubled firms.

Keywords: Relative leverage; Target leverage; Stock returns; Banking relationship (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927538X16301585
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:40:y:2016:i:pa:p:86-101

DOI: 10.1016/j.pacfin.2016.09.002

Access Statistics for this article

Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

More articles in Pacific-Basin Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().