Changing banking relationships and client‐firm performance: Evidence from Japan for the 1990s

• Published date: 01 September 2014
• Author: Daisuke Tsuruta
• Date: 01 September 2014
• DOI: http://doi.org/10.1016/j.rfe.2013.12.002

Changing banking relationships and client-firm performance: Evidence

from Japan for the 1990s

Daisuke Tsuruta ⁎

Collegeof Economics, Nihon University,1-3-2 Misaki-cho,Chiyoda-ku, Tokyo102–8360, Japan

abstractarticle info

Articlehistory:

Received10 May 2013

Receivedin revised form 15 December2013

Accepted25 December 2013

Availableonline 4 January 2014

JEL classification:

G20

G21

G32

Keywords:

Bank–firmrelationships

Bank distress

Privateinformation

The extantliterature generallysuggests that the performanceof client firms deterioratesif their distressedmain

bank reducesthe supply of credit.However, this insight is onlyconsistent with the notionthat main banks have

an informationadvantage over otherbanks to the extent that a clientfirm has trouble getting accessto credit if

the firmchanges its main bank. This papershows that Japanese firmsdid change their main bankingrelationship

whentheir main banks become distressedin a period with financialshocks. Surprisingly,these firms did not suf-

fer fromloss of access to credit and actuallytheir performancesignificantly improvedafter their change of main

banks.

© 2014 ElsevierInc. All rights reserved.

1. Introduction

Banking theorysuggests that any deterioration in bankhealth has a

potentialnegative impact on the performanceof client firms. To inves-

tigate this, many empirical studies focus on the negative shock of

the bursting of the asset price bubble in Japan during the late 1980s.

During this period,the performance of banks began to deterioratefol-

lowingthe substantial increasein nonperforming loans duringthe bub-

ble economy. These conditions crea ted an ensuing weakness in the

bankingsector during the 1990s.In focusing on this shock, thesestudies

argue that bank health entails negative impacts on client-firmperfor-

mance duringthe subsequent deep recession.

For example, using Japanese firm-level data, Gibson(1995) shows

that client-firm investment is sen sitive to the financial health of the

main bank. Similarly, Kang and St ulz (2000) conclude that firms

whose debt in 1989 included a higher propor tion of bank loans per-

formed relatively worse after the bursting of the bubble economy. In

other work, Yamori and Murakami (1999) infer the negative effect of

bank failureon client-firm stock returnsusing the case of the Hokkaido

Takushoku Bank.

1

Using firm-level data outside Japan, seve ral other

studies (see,Agarwal & Elston, 2001; Fok,Chang, & Lee, 2004; Ongena,

Smith, & Michalsen, 2003) also find tha t the performance of client

firms is adversely affected by ba nk weakness. Most recently, Soh n

(2010) has argued that the positive abnormal retu rns of client firms

are significantly associated with the forced market exitof failed banks

and the transferof their loans to healthy banks.

For the mostpart, these studies assumethat main banks havean in-

formation advantage over other ban ks gained through their lending

relationships. The asymmetric information between banks and client

firms then induces the problems of adverse selection and moral haz-

ard. To mitigate theseproblems, the client firm and the bank establish

long-term relationships, so-c alled relationship lending. As Peters en

and Rajan (1994) have argued, relati onship lending enhances credit

availabilityfor client firms,representing the main benefitof banking re-

lationships.However,banking relationshipscan also have a dark side,as

arguedby Rajan (1992). For example, client firms can face severe finan-

cial constraints if they switchfrom an existing banking relationship be-

cause otherbanks may not have sufficient information on the firm.As a

result,Ra jan (1992) arguesthat client firms exiting an existingbanking

relationship face a holdup problem in the availability of credit.

If informed main banks are then obli ged to decrease lending for

whateverreason, other banks cannotoffer sufficient credit to thesecli-

ent firms because of theprevailing information problem.During finan-

cial shocks, as Udell(2009) has pointed out, distressedbanks decrease

loans to maintain an adequate capital ratio. Therefore, existing client

firms face financialshortfalls and thus experience poorerperformance.

In Japan, as Hoshi, Kashyap, and Scharfstein (1991) and Wu and Yao

(2012) argue, the relationship bet ween main banks and their client

Reviewof Financial Economics 23 (2014)107–119

⁎Tel./fax:+ 813 3219 3606.

E-mailaddress: tsuruta.daisuke@nihon-u.ac.jp.

1

That said, Hori (2005) suggests, using unlistedfirm data, that the magnitude of the

negativeeffects of bank failure dependson both client characteristicsand the liquidation

procedureused by the bank.

1058-3300/$–see front matter © 2014 ElsevierInc. All rights reserved.

http://dx.doi.org/10.1016/j.rfe.2013.12.002

Contents listsavailable at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe