Bank Ties and Bond Market Access: Evidence on Investment-cash Flow Sensitivity in Japan, Issue 9644
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.
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adjustment cost parameter asymmetric information bank affiliation bond eligibility criteria bond issuing criteria cash ﬂow observations cash ﬂow sensitivity close bank coefﬁcient coefficient on cash CONST convertible bonds credit crunch deﬁnition denote significance dependent variable dividend dummies are included earnings per share empirical equation using OLS ﬁnancial ﬁnancing constraints ﬁnancing options ﬁnd firm fixed-effects firm groups ﬁrm sorting Firms Mean ﬁrst ﬂow sensitivity analysis GMM regression group ﬁrms Hayashi Hoshi Independent Bank Group independent ﬁrms investment-cash ﬂow sensitivity issue bonds IU ﬁrms Japan Japanese Keiretsu membership LAGIK manufacturing ﬁrms Median NEG CF negative cash ﬂow non-fundamental portion OLS and GMM OLS regression operating proﬁts portion of Q POS CF PRAT price ratio probit proﬁtability regressors Restricted robustness check sample period sample statistics Sargan Test Semi-Res serial correlation signiﬁcant speciﬁcations standard errors statistics GMM Table presents results target investment rate Tobin's Q Unrestricted variable is I/K