Main Bank System Research Articles

Ethical compatibility of socially responsible banking: Comparing the Japanese main bank system with the USA

Although the broad idea of socially responsible banking is widely accepted, no precise definition of ethical banking is available because of various ethical preferences. This paper develops the concept of ethical compatibility as a theoretical description of ethical banking. It offers a multi-level framework to illustrate the compatibility between the regional ethics and preferred forms of ethical banking prevalent in Japan and the USA. This paper first revisits the two paradigms of financial systems and examines the two types of business purposes as ethics. Drawing on the literature concepts, this study posits a conceptual framework demonstrating the compatibility between the actors, which are dynamic yet representative at each level. This paper concludes that the ethically compatible form of banking is socially responsible in the respective societies. Additionally, this paper advances the concept of relationship lending by making it globally applicable.

How Do Bank Lenders Use Borrowers' Financial Statements? Evidence from a Survey of Japanese Banks

Previous studies suggest that Japanese suppliers of capital, such as main banks, have private sources of information, and thus, the quality of public accounting information may be less relevant to their decisions. Studies also indicate that the firm–bank relationship in Japan has weakened with time, potentially increasing the importance of public accounting information in the Japanese loan market. Given these contradictory results, we survey bank lenders in Japan—a bank-centered economy—and provide evidence on whether and how they use borrowers’ accounting information. Using responses from 99 Japanese banks, we examine bank lenders’ views on (1) the main bank system, (2) the use of accounting information, and (3) financial covenants. Whereas main bank lending has declined over time, nearly all respondents agreed that the main bank system is still prevalent in loan markets. Moreover, bank lenders tend to use accounting information for lending decisions and continuous monitoring purposes, prefer persistent accounting earnings tied to cash flows, and modify borrowers’ working capital conservatively. We also find that bank lenders mainly use financial covenants in syndicated loans as tripwires to obtain bargaining power in the event of borrower financial distress. The evidence complements archival studies and provides additional insights on the importance of accounting information in lenders’ practice.

日照市主办银行制度对小微企业债务融资成本影响分析

日照市主办银行制度对小微企业债务融资成本影响分析

Debt covenants in Japanese loan markets: in comparison with the traditional relationship banking

AbstractThis study investigates determinants of debt covenants in Japanese loan markets. We focus on a unique monitoring mechanism by Japanese banks and hypothesise that debt covenants substitute for the traditional main bank governance. Consistently, we find that debt covenants are less likely to be used for firms with stronger ties with their main banks. We also document that such use of debt covenants results in borrower’s upward earnings management. Overall, our evidence suggests that, in the Japanese context, debt covenants are used as a substitute for the main bank system yet they alone are an incomplete monitoring mechanism.

A Definition of Relationship Lending in a Global Context: A Study of the Japanese Main Bank System in the USA

A Definition of Relationship Lending in a Global Context: A Study of the Japanese Main Bank System in the USA

Korporativno upravljanje u Japanu - sistemi odbora i nezavisnost članova uz osvrt na funkciju nadzornog odbora u srpskim kompanijama

The corporate governance in Japan was mostly characterized by the main-bank system, board members that are internally promoted executives and employee-focused management. That is why Japan has been behind other developed countries in appointing independent directors, partly due to its exclusionist corporate culture. After a quite period of detailed reforms today’s corporate governance in Japan neither converges uniformly with the American-type model, nor it’s simply adjusted with two-tire system of the German model of corporate governance. Rather, a hybrid-type system is becoming dominant as a choice for Japanese company law, so it is endorsed as a type of the best practice in corporate governance. It is certain that the reforms sought to achieve a more efficient system of internal control of the company’s business, which gave its expression in a complex mixed system with an emphasis on increasing the number of outside members. Relatively recent company law reforms in Serbia have made it possible to choose between one-tire and two-tire system, so domestic companies are opening up the question of a choice that is more acceptable for our business environment. Solutions that Japanese company law applied can be an excellent example of persistent efforts for using past experiences, correcting mistakes and bringing successes to the future.

The Real Effects of Accounting Earnings Attributes: Evidence from Japan

The purpose of this study is to analyze the real effects of accounting earnings attributes in Japanese financial markets. Previous studies show that useful accounting attributes optimize firm’s investment levels through alleviating asymmetric information. Biddle and Hilary (2006), however, do not find the effects in Japanese economy, and suggest that its reason is the alternative information-problem-mitigating mechanisms. For instance, main bank system is able to alleviate the effects of accounting information on investment. Nevertheless some researchers indicate that the financial intermediaries might not effective, and its importance shrinks after the 1990’s. Hence, not a trivial question is whether the real effects of EAs are observed in Japanese economy. Using long historical data of Japanese firms, I find that useful accounting information optimizes firm’s investment levels. Specifically, not all but most earnings attributes alleviate over-investment; Earnings volatility, persistence, predictability, accruals quality, and aggregated indicator. Meanwhile, they do not alleviate over/under-investment. In addition, smoothness does not have significant effects or does have the effects opposite from my expectation. In conclusion, the real effects can be observed even in Japanese economy.

The Moderating Effect of the Main Bank System in Japan on the Association between Financial Risk and Cost Behavior

This study examines the relationship between financial risk and cost behavior both theoretically and empirically. We suggest that financial risk will affect the degree of discretion of managerial resource adjustment decisions by its impacts on financial flexibility and the cost of capital. As expected, our results show that financial risk increases the degree of cost anti-stickiness in the case of a prior activity decrease. On the other hand, financial risk appears to have no statistically significant influence on cost behavior in the case of a prior activity increase. This result is not consistent with our prediction. This study also examines the moderating effect of the close relationships between firms and banks on the association between financial risk and asymmetric cost behavior by using the data of the main bank system in Japan. The results of the study show that the close ties with main banks will mitigate the adverse impacts of financial risk and enlarge the degree of managerial discretion in adjusting resources in firms with high financial risk.

Corporate governance, political involvement, and internationalization: An empirical investigation in Japan and Taiwan

This paper investigates the effects of intervention by government and financial institutions on the degree of internationalization in Japan and Taiwan, with particular attention to the impact of the main bank system and the system of amakudari (the appointment of retired bureaucrats to the boards of public companies). The empirical results indicate that companies with a higher degree of internationalization have boards with stronger monitoring ability and therefore can fend off intervention by government. On the other hand, a negative relationship is established between the presence of retired bureaucrats on boards (amakudari) and the subsequent degree of internationalization. Similarly, intervention by financial institutions results in a lower subsequent degree of internationalization. Thus, although representatives of government and financial institutions may attempt to use their influence to prompt international expansion, the monitoring ability of the board may be jeopardized, to the detriment of internationalization.

Corporate Governance, Political Involvement, and Internationalization: An Empirical Investigation in Japan and Taiwan

This paper investigates the effects of intervention by government and financial institutions on the degree of internationalization in Japan and Taiwan, with particular attention to the impact of the main bank system and the system of amakudari (the appointment of retired bureaucrats to the boards of public companies). The empirical results indicate that companies with a higher degree of internationalization have boards with stronger monitoring ability and therefore can fend off intervention by government. On the other hand, a negative relationship is established between the presence of retired bureaucrats on boards (amakudari) and the subsequent degree of internationalization. Similarly, intervention by financial institutions results in a lower subsequent degree of internationalization. Thus, although representatives of government and financial institutions may attempt to use their influence to prompt international expansion, the monitoring ability of the board may be jeopardized, to the detriment of internationalization.

Preserving and Exercising Financial Flexibility in the Global Financial Crisis Period: The Japanese Example

This article examines whether Japanese firms replicate the DeAngelo and DeAngelo (D&D) model, which assumes that firms achieve financial flexibility by increasing their debt capacity or paying out large dividends and exercise it when abnormal cash shortfalls occur. The article analyzes frequency distributions and means across three net cash outlay states (extreme deficits, deficits, and surplus) using 10-year panel data on 1,555 Japanese firms. It also conducts Tobit regression analyses based on the dynamic features of financial flexibility postulated by D&D. The results reveal that Japanese public firms did not effectively utilize financial flexibility to raise external funds in times of financial need, particularly during the global financial crisis sparked by the Lehman Brothers collapse in 2008. This article therefore concludes that the D&D model does not fit the data. Further, the results imply that although Japanese public firms may have virtually no debt, their motive is not to achieve financial flexibility, but to maintain bank relationships through cross shareholding or the main bank system. This is the first study to directly test the D&D model, showing that it cannot be generalized, particularly in the case of Japan, where the relationships between firms and banks are strong. © 2016 Wiley Periodicals, Inc.

Main bank relationships and underwriter choice

We examine why independent securities companies and bank subsidiary securities companies can coexist as underwriters in the Japanese corporate bond market in a period when the main bank system is very important in the Japanese financial system. While it has already been found that lending and shareholding relationships between main banks and issuers are not important determinants of underwriting commissions or yield spreads, they are found to be important determinants of lead underwriter choices. The findings about the impact of main bank relationships on underwriter choices suggest that an issuer with a strong main bank shareholding relationship chooses the main bank subsidiary securities company as the lead underwriter, and is unlikely to choose an independent securities company. An issuer with a larger sized bond issue tends to choose an independent securities company as the lead underwriter for its marketing ability. The findings from four different models consistently support the idea that independen...

Evolving Ownership and the Capital Structure Regime in Japan

This study is an attempt to investigate the implications of changes in ownership structure and control transfer in the Japanese corporate market—a trend attributed mainly to the government’s increasing liberalization policies during the 1990s. Our results show that firms characterized by more concentrated ownership are likely to prefer less debt as ownership concentration reduces the extent of agency costs between managers and shareholders and facilitates equity issues. The main bank system enables corporations to obtain funds easily through the debt market. Additionally, unwinding cross-shareholding between banks and corporations provides impetus for investment in relatively risky projects. The ownership pattern of private and foreign individuals is consistently associated with a shift from bank debt to equity financing. Moreover, managerial ownership reduces the risk of wasting free cash flows. Managers make fewer decisions that may have a negative effect on the firm’s value because the part of costs that they will absorb as shareholders increases as their share of capital rises. The results suggest that government ownership is associated with more pressure on management and enforces the efficient use of cash flows. Changes in ultimate ownership will likely lead to major asset and capital restructuring in the coming years.

Political Intervention, Corporate Governance and Firm Performance: An Empirical Investigation in Japan and Taiwan

This paper investigates the interaction of government and financial institutions in the operation of a company through the relationship of the main bank system and the system of amakudari (appointing retired bureaucrats to the boards of public companies). Consistent with resource dependency theory, the empirical results suggest that governments and financial institutions tend to appoint representatives to the board in order to help troubled companies. However, a negative relationship is established between the presence of such amakudari and subsequent firm performance. Thus, while the system of amakudari may use its influence in an attempt to save troubled companies, it is possible that, as suggested by agency theory, the monitoring ability of the board may consequently be jeopardized to the detriment of overall firm performance.

Cross-Shareholding, Returns and Entrenchment Behaviour Among Japanese Firms, 1990-2008

This paper is concerned with the nature of ownership, returns and corporate performance and investment behavior in the ‘post-bubble’ environment surrounding Japanese firms. Market participants have feared that ‘unwinding’ of cross-shareholding would have negative consequences for returns, on the assumption of a downward sloping demand curve for equities. We examine whether this is the case, but more importantly consider what consequences the changing nature of ownership might have for firm behavior. Interestingly, while overall unwinding of cross-holdings is indeed consistent with downward sloping demand curves for equities, controlling for endogeneity biases and focusing on holdings by financial institutions, we find the opposite result. We interpret this as evidence that at least one facet of the traditional ‘main-bank system’ of Japan is alive and well- namely that increased bank holdings can be viewed as intervention by banks in assistance of financially distressed firms. In terms of firm behavior, our results are consistent with the literature on entrenchment. That is, firms that are more closely cross-held by other firms (financial or non-financial) tend to invest more heavily in capital stock and research and development. This is consistent with the notion that firms that are less vulnerable to takeover tend to spend and invest more than their more takeover prone counterparts.

A Study on Japan's Financial System: Focusing on changes in its Main Bank System

A Study on Japan's Financial System: Focusing on changes in its Main Bank System

Corporate Governance and Capital Structure

This study is an attempt to investigate the implications of the ownership structure and control transfers in Japanese corporate market which are attributed mainly to the government’s increasing liberalization policies during 1990s. The results show that that firm with more concentrated ownership may prefer less debt as ownership concentration reduces the extent of agency costs between managers and shareholders and facilitate equity issues. Furthermore, the main bank system enables corporations to efficiently obtain funding and involved to invest in relatively risky projects. However, unwinding the cross-shareholding between banks and corporations allows for efficiency gain. The ownership share of private and foreign individuals is consistently associated with a shift from bank debt to equity financing. The ownership transfer to other affiliated corporations, private and foreign individuals is consistently associated with high efficiency in expenditure and raising funds through equity financing. Moreover, when managerial ownership increase, the risk to waste the free cash flow is limited and managers take fewer decisions that will have some negative effects on the firm value because the part of costs that they will absorb, as shareholding increases with their part of the capital. The results suggest that government ownership is associated with more pressure on management to limit the wasting of free cash flow. Furthermore, it appears that change in ultimate ownership leads to major assets and capital restructuring in the following years.

The new main bank system

We develop a main bank model where the main bank decides whether or not to raise additional funds from the capital market to continue to invest in a borrowing firm when nonmain banks withdraw funds. We show that the threat of withdrawal of nonmain banks is more likely to force the main bank to perform efficiently in handling troubled loans, thereby preventing problems with zombie firms, if the potential cash flow (liquidation value) of the firm decreases (increases) relative to the amount funded by nonmain banks. The theoretical results provide both efficiency evaluations for the renewal of the main bank relation in Japan after the end of the 1990s and empirical implications for the renewed main bank system.

Understanding the rise and decline of the Japanese main bank system: The changing effects of bank rent extraction

This paper shows how main bank rent extraction affects corporate decisions about investment and financing during financial regulatory reform. Our model predicts that limited loanable funds can initially contain main bank controlled overinvestment, even when new equity is available to the firm. Abundant funds facilitate overinvestment to the detriment of firm profitability. A shift of control rights back to the firm due to financial deregulation produces an “equity for upside potential and bank debt for downside risk” bias against the banks. A stock market and real estate boom in Japan made it harder than ever for the banks to diversify risk. The insights from this analysis help explain why Japan’s main bank system was beneficial in the (capital constrained) postwar period but became harmful during the (capital abundant and even bubbly) 1980s, and why the adverse shocks of the post-deregulation 1990s had such severe effects on the banking system.

The New Main Bank System

We develop a main bank model where the main bank decides whether or not to raise additional funds from the capital market to continue to invest in a borrowing firm when nonmain banks withdraw funds. We show that the threat of withdrawal of nonmain banks is more likely not only to force the main bank to perform efficiently in handling troubled loans, thereby preventing problems with zombie firms, but also to undertake information acquisition if the potential cash flow (liquidation value) of the firm decreases (increases) relative to the amount funded by nonmain banks and if the likelihood of firm success decreases. The theoretical results provide both efficiency evaluations for the renewal of the main bank relation in Japan after the end of the 1990s and empirical implications for the renewed main bank system.