How Bank Health Affects Capital Structure and Performance of IPO Firms? - Evidence from the Japanese Financial Crisis

Abstract

This paper investigates whether the health of a bank affects the client firm’s capital structure and then leads to inefficiency in the client firm’s decision-making. Using the Japanese IPO dataset from 1996 to 2005 when bank sectors suffered liquidity shortages and IPO booms occurred at the same time, our empirical study reveals the following findings. First, we find that IPO firms whose main bank’s health is worse have greater financial leverage. Second, such IPOs, with unhealthy banks, raise more proceeds at the time of the IPO, and the probability of SEO within three years is high. Last, we find that such over-lending by the poor-health bank leads to higher cost of capital, and the subsequent long-term stock performance of firms with poor-health banks is worse. Overall, our empirical results reveal that the health of a bank affects its client firms’ capital structure and can lead to inefficiency in their client firms’ behavior.