Abstract:
Among stock-market-listed Japanese firms in 1994-95, the financial health of the firm's main bank
did not significantly affect its investment behavior, after controlling for stock market valuation and
cash flow. However, among the subset of bank-dependent firms, investment was lower by over 50
percent at firms that have one of the lowest-rated banks as their main bank. Because low-rated banks
are smaller and deal with fewer firms, and because bank-dependent firms themselves tend to be
smaller than non-bank-dependent firms, the aggregate effect on business investment in 1994-95 that I
identify is tiny. These results contrast with Gibson (1995), a similar study which, using data for
1991-92, found a small effect of poor bank health on investment for all stock-market-listed Japanese
firms and no difference between bank-dependent and non-bank-dependent firms.
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