Working Paper: NBER ID: w3079
Authors: Takeo Hoshi; Anil Kashyap; David Scharfstein
Abstract: During this decade the structure of corporate finance in Japan has changed dramatically. Japanese firms that once used bank debt as their prime source of financing now rely more heavily on the public capital markets. This trend was facilitated by the substantial deregulation of the Japanese capital markets. In an earlier paper (Moshi, Kashyap, and Scharfstein 1988). we demonstrated that investment by firms with close bank relationships appears to be less liquidity constrained than investment by firms without close bank ties. We interpreted this finding as evidence that bank ties tend to mitigate information problems in the capital market. This paper tracks the investment behavior of firms that have recently weakened their bank ties in favor of greater reliance on the bond market. The results suggest that these firms are now more liquidity constrained. The paper concludes with a discussion of why firms would loosen their bank ties in light of these liquidity costs.
Keywords: Corporate Finance; Bank Monitoring; Deregulation; Investment Behavior
JEL Codes: G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank monitoring (G21) | Investment behavior (G11) |
| Close bank relationships (G21) | Less sensitivity of investment to liquidity (G19) |
| Loosened bank ties (G28) | Strong sensitivity of investment to cash flow (G31) |
| Reduced bank monitoring (G21) | More liquidity constrained (E51) |
| Bank monitoring (G21) | Diminished liquidity constraints (E41) |