Main bank relationships and risk taking in Japanese listed firms

Abstract

ABSTRACT Bank–firm relationships play a role in the degree of corporate risk taking that guides financing decisions. As such, we study whether the magnitude of corporate risk taking is associated with close bank–firm ties in Japan. To this end, we use data on publicly listed firms from 2007 to 2016 following the bank mergers that occurred in the wake of Japanese financial deregulation, and select risk variables such as idiosyncratic and total risk as proxies for corporate risk taking. The empirical evidence suggests that close bank ties can drive firms to take fewer risks. The results remain unchanged even after controlling for endogeneity. Finally, we observe that smaller firms with higher growth opportunities tend to reduce the degree of corporate risk taking when they form close bank ties.