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

52 Pages Posted: 20 Sep 2007

See all articles by Patrick McGuire

Patrick McGuire

Bank for International Settlements (BIS)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2004

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. Building on the results in Hoshi, Kashyap and Scharfstein (1991) and Hayashi (2000), this paper investigates whether bank ties in Japan were costly for mature and healthy firms in the 1980s and 1990s 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 (March 2004). BIS Working Paper No. 151, Available at SSRN: https://ssrn.com/abstract=786388 or http://dx.doi.org/10.2139/ssrn.786388

Patrick M. McGuire (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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