Main Bank Relationship Research Articles

Main Bank Relationships and Capital Structure in Japan

In this paper, we argue that the main bank in Japan acts as a quasi-inside monitor of the firm, delegated by other lenders, and that main bank relationships increase the debt capacity of the firm by reducing the agency cost of debt. On the other hand, firms with high debt ratios will strengthen main bank relationships due to the agency problems associated with high leverage. Thus, the debt ratio and main bank relationships are simultaneously determined and have positive effects on each other. The empirical results we obtain support these hypotheses.J. Japan. Int. Econ.September 1996,10(3), pp. 250–261. Department of Economics, Kyoto Sangyo University, Kamigamo, Kitaku, Kyoto 603, Japan; and Department of Business Administration and Information, Setsunan University, Ikedanakamachi, Neyagawa, Osaka 572, Japan.

Firm performance, corporate governance, and top executive turnover in Japan

We examine the role of corporate governance mechanisms during top executive turnover in Japanese corporations. Consistent with evidence from U.S. data, the likelihood of nonroutine turnover is significantly related to industry-adjusted return on assets, excess stock returns, and negative operating income, but is not related to industry performance. The sensitivity of nonroutine turnover to earnings performance is higher for firms with ties to a main bank than for firms without such ties. Outside succession in Japan is more likely for firms with large shareholders and a main bank relationship. We document performance improvements subsequent to nonroutine turnover and outside succession.

Banks in the board room: The American versus Japanese and German experiences

As global capital and product markets have become more integrated, national differences in corporate governance have been drawn into sharp relief. One of the chief differences among corporate governance systems in different parts of the world is the relationship maintained by major financial institutions, commercial banks in particular, to industrial corporations. Specifically, it is commonly observed that large financial intermediaries in Japan and Germany tend to have much closer, longer-term relationships with many of their industrial clients than do their counterparts in the Anglo-American family of countries. Furthermore, there is evidence that these relationships are associated with differences in corporate investment, financing, and performance. Hoshi, Kashyap, and Scharfstein (1990), for example, find evidence that investment by Japanese corporations with close main bank relationships are less sensitive to variations in operating cash flow than is true for American companies lacking such relationships. Similarly, Prowse (1990) finds that bank ownership of equity in Japan reduces shareholder-debtor conflicts and allows Japanese companies to support more leverage, other things being equal. Gerlach (1987), Kester (1991a,b), and Suzuki and Wright (1985) all document the critical role that Japanese main banks, (i.e., lead lenders with close, long-term relationships to industrial borrowers) play in the monitoring and control of Japanese corporations and in their restructuring in the event of financial distress. Kester (1991a) also documents this role by socalled Hausbanken in Germany. Although he does not examine company-bank relationships in Japan per se, nor the mechanism by which Japanese executive directors are replaced, Kaplan (1991) provides formal empirical evidence supporting the claim that Japanese boards of directors are subject to closer monitoring and quicker replacement by outside directors in association with declining performance than are their American counterparts.

The Japanese Cost of Finance: A Survey

The extensive literature on whether the cost of capital is low in Japan is surveyed in this paper. Along the way, it considers: the leverage of Japanese firms, dividend payout, equity price/earnings ratios, corporate taxation, cross-ownership, land price/rental ratios, speculative bubbles, the household saving rate, international capital mobility, the lower cost of financing investment internally and through main bank relationships, and the move to a more market-oriented system as these relationships break down. The conclusion that emerges from the literature is that the cost of finance was indeed lower in Japan in the 1980s than in the United States, by a variety of measures. But trends of domestic and international liberalization, followed by the events of 1990, have now raised the cost of capital in Japan to the U.S. market level.

Informational properties of the Japanese financial system

This paper investigates how the agency problems have been solved in the Japanese financial system. After discussing two ways of coping with informational imperfection in financial markets, i.e., the market and the hierarchy solution, we focus on the workings of the main bank relationship that can be regarded as one of the hierarchy solutions to evade the informational imperfection. The main bank relationship has been important because of its functions as a ‘delegated monitor’. However, the inflexible nature of the hierarchy solution has led to the underdevelopment of capital markets, which seems a weak point of the Japanese economy.

What role has the “Main Bank” played in Japan?

This paper investigates whether there has been risk-sharing between banks and borrowing companies through the main bank relationship in Japan. First, we evaluate the importance of risk-sharing by statistically examining the factors behind changes in main bank relationships. If the main bank relationship is based upon a mechanism of risk-sharing, changes in the relationship ought to be systematically related to changes in the risk that borrowing companies face. Second, we evaluate the importance of the main bank relationship as a means of risk-sharing by comparing the correlation between financial expenses and the operating profits of specific companies with the degree of their dependence on main banks. The first investigation indicates that growth by a company, the presence in its financial grouping of a large bank, and a history of past changes in its main bank, to differing extents all exert significant influence on changes in the main bank relationship. The main bank relationship in Japan does indeed have some empirical content. However, neither investigation supports the hypothesis of risk-sharing via the main bank relationship. J. Japan. Int. Econ., June 1988, 2(2), pp. 159180. Faculty of Economics, University of Tokyo, Bunkyo-ku, Tokyo 113,