New directions in Japanese bank-firm-relationships: does a relationship matter for corporate performance?

Tobias Miarka and Jianping Yang

No FS IV 97-40, Discussion Papers, Research Unit: Market Dynamics from WZB Berlin Social Science Center

Abstract: The paper is a first step to tests the impact of bank-firm-relationships on corporate performance under changing economic conditions. Using a data set of standardized annual financial statements of 100 Japanese corporations all listed at the First Section of the Tokyo stock exchange, at the current stage of analysis we find empirical evidence that: (1) investment is determined by output expectations. (2) Q is a significant variable for investment behavior. (3) Investment is restricted by debt-equity ratio, (4) therefore the much claimed signaling effect of a high debt-equity ratio does not hold. (5) In contrast to Germany though, banks allow firms with bank-relationships higher short term debt to total finance and long term loans to total finance ratios, whereas firms with no relationships have a higher equity ratio. (6) Banks influence firms with bank-relationships to decide on low risk investment decisions. Therefore they are able to allow a higher debt-equity ratio (in contrast to Germany). (7) Non-bank-related firms are much more profitable than bank-related firms. The difference is even stronger than in Germany. Yet they also have to bear a higher amount of risk. (8) Apparently the policy of banks in Japan is much different to German banks: Banks force bank-affiliated firms to follow an investment policy, which is much more cautious and therefore leads to less profitability. This again leads to a bank-policy that allows to supply these firms with higher amounts of borrowings.

Date: 1997
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