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

59 Pages Posted: 26 Apr 2003 Last revised: 9 Nov 2022

See all articles by Patrick McGuire

Patrick McGuire

Bank for International Settlements (BIS)

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Date Written: April 2003

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.

Suggested Citation

McGuire, Patrick M., Bank Ties and Bond Market Access: Evidence on Investment-Cash Flow Sensitivity in Japan (April 2003). NBER Working Paper No. w9644, Available at SSRN: https://ssrn.com/abstract=398548

Patrick M. McGuire (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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