Abstract
We examine how bank health affects firms' cash holdings in Japan, a bank-centered market. We find that the deterioration of bank health leads firms to save more cash from their cash flows. The deterioration of bank health decreases bank-dependent firm investment, and the cash holdings of bank-dependent firms mitigate underinvestment problems. These effects are statistically and economically significant. These results, which are consistent with the financial constraint hypothesis and are inconsistent with the bank power hypothesis, imply that bank health renders firms financially constrained and affects firms' cash holdings and investments in a bank-centered market.
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