Bank Ties and Bond Market Access: Evidence on Investment-Cash Flow Sensitivity in Japan

Patrick McGuire

No 9644, NBER Working Papers from National Bureau of Economic Research, Inc

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. This paper investigates whether bank ties in Japan were costly for mature and healthy firms in the 1980's and 1990's, 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.

JEL-codes: G3 (search for similar items in EconPapers)
Date: 2003-04
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: CF EFG
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Citations: View citations in EconPapers (9)

Published as Patrick M. McGuire, 2003. "Bank ties and bond market access : evidence on investment-cash flow sensitivity in Japan," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 216-241.

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Working Paper: Bank ties and bond market access: evidence on investment-cash flow sensitivity in Japan (2004)
Working Paper: Bank ties and bond market access: evidence on investment-cash flow sensitivity in Japan (2003)
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