Bank ties and bond market access: evidence on investment-cash flow sensitivity in Japan

Patrick McGuire

No 151, BIS Working Papers from Bank for International Settlements

Abstract: The banking literature has established that banks can alleviate information asymmetries between lenders and borrowers, while the Q literature has used cash flow sensitivity analysis to test whether financing constraints hinder investment. Building on the results in Hoshi, Kashyap and Scharfstein (1991) and Hayashi (2000), this paper investigates whether bank ties in Japan were costly for mature and healthy firms in the 1980s and 1990s and whether banks continued to facilitate investment once non-bank financing options became available. Using the explicit bond issuing criteria to solve the endogenous firm sorting problem, I measure the investment-cash flow sensitivity of Japanese firms, and find it lowest for those firms known to have faced bond market constraints. I then find that the spread in sensitivity was much larger for main bank client firms, once bond market access is controlled for. This result, coupled with results on the relative profitability and bond activity of bank-affiliated firms, is consistent with banks capturing the net benefits of relationship lending during the period of bond market deregulation.

Keywords: Japan; Bank ties and bond market access; investment-cash flow sensitivity (search for similar items in EconPapers)
Pages: 52 pages
Date: 2004-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Bank ties and bond market access: evidence on investment-cash flow sensitivity in Japan (2003)
Working Paper: Bank Ties and Bond Market Access: Evidence on Investment-Cash Flow Sensitivity in Japan (2003)
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