Reduction in Bank Ownership and Firm Performance: Evidence from Japan

Abstract

Recently in Japan, the Banks’ Shareholdings Restriction Law requires that banks substantially decrease shareholdings. This study examines firms that experienced a 5% or greater reduction in percentage ownership by banks for a year during 2001–2004. Results show that those firms improve their accounting performance. That performance improvement is positively related to the ex ante debt ratio. Furthermore, changes in those firms’ assets are negatively related to the ex ante debt ratio. The results suggest that the reduction in bank ownership enhances the disciplinary role of debt. Finally, firms achieve better performance improvements when non-Japanese owners replace bank ownership.

Keywords: Ownership structure, Bank ownership, Disciplinary role of debt, firm performance, Japan

JEL Classification: G21, G28, G32