Research and Studies

Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2005 > Bank Health and Investment: An Analysis of Unlisted Companies in Japan

Bank Health and Investment: An Analysis of Unlisted Companies in Japan*1

April 2005
Shin-ichi Fukuda*2
Munehisa Kasuya*3
Jouchi Nakajima*4

Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.
If you have any comment or question on the working paper series, please contact each author.
When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department (webmaster@info.boj.or.jp) at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.

Click on wp05e05.pdf (258KB) to download the full text.

  • *1 Earlier versions of this paper were presented at the Bank of Japan (Research and Statistics Department) and the Institute of Statistical Research Conference at Hangzhou, China. We would like to thank the participants for their helpful comments. Views expressed in this paper are those of authors; they do not necessarily reflect those of the Bank of Japan or Research and Statistics Department.
  • *2 Department of Economics, University of Tokyo
    e-mail: sfukuda@e.u-tokyo.ac.jp
  • *3 Research and Statistics Department, The Bank of Japan
    e-mail: munehisa.kasuya@boj.or.jp
  • *4 Graduate School of Economics, University of Tokyo

Abstract

Because a borrower often faces switching costs in dealing with individual banks, the financial health of any given bank might affect the borrower's cost of funds. These costs would be particularly large for firms that have close relationships with relatively few banks. The purpose of this paper is to investigate whether the weakened financial conditions of banks have reduced the investment activities of small and medium firms in Japan. Estimating Tobin's Q investment functions, we examine the determinants of investment for unlisted Japanese companies in the late 1990s and the early 2000s. We find that several measures of bank-specific financial health have significantly large impacts on investment by borrowers, even when observable characteristics relating to Tobin's Q, cashflow, and leverage are controlled. We also find that multiple banking relationships, which tend to have a negative impact on investment in general, may be beneficial in relieving hold-up problems when deteriorated bank health does matter.

Key words:
Tobin's Q, Bank-firm relationship, Hold-up problem, Unlisted firms

JEL #:
E22, G21, G31, G32