Main bank relationships and risk taking in Japanese listed firms

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.

KEYWORDS:

• Main bank
• corporate risk taking
• Japan
• corporate governance

JEL CLASSIFICATION:

• G10
• G21
• G32

Acknowledgments

We thank for Editor Mark Taylor and an anonymous reviewer for their helpful comments and suggestions. This paper was presented at SOAS University of London, 2019 NCU and Chubu JSME Research Workshop on Accounting & Finance, 2019 Conference of the 630 International Corporate Governance Society, and 2019 Annual Meeting of the Australasian Finance and Banking Conference. We also thank for Searat Ali, Robert Faff, Laurence Harris, Victor Murinde, Wataru Ohta, and participants at seminars and conferences.

Disclosure statement

On behalf of all authors, the corresponding author states that there is no conflict of interest.

Notes

¹ Following Aoki, Patrick, and Sheard (1994), a main bank is the largest lender to a firm. Additionally, main banks generally own large shares of client firms and take on monitoring roles of client firms as both lenders and shareholders (Sheard 1994). Thus, main banks are defined as both shareholders and lenders of their client firms.

² Commercial bank involvement in the corporate governance of German Universal banks and Japanese main banks is classified as bank-dominated corporate governance and it is different from market-oriented systems in Anglo-American countries such as US (Macey and Miller 1995, 1997).

³ After the economic turmoil in the 2000s, the main banks were rescued by taxpayer funds (Sakawa and Watanabel 2018).

⁴ This index accounts for approximately 85% of the Tokyo Stock Exchange in terms of market capitalization.

⁵ After the subsequent M&A among banks, the size of Japanese large banks has been comparable to that of US during 2017 (Sakawa et al. 2020).

Additional information

Funding

This work was financially supported by the Japan Ministry of Education, Culture, Sports, Science and Technology, Grants-in-Aid for Scientists (B, 17KT0036), Grants-in-Aid for Scientists (C, 17K03695), Grants-in- Aid for Young Scientists (A, 17H04784), and Grant-in-Aid for Research in Nagoya City University (2021201).