Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups

TLDR

Japanese firms with close bank ties are better informed and face fewer capital‑raising problems, whereas those with weaker ties encounter greater information and incentive issues. The study examines how capital‑market information and incentive problems influence investment decisions. The authors compare two groups of Japanese firms—those with strong versus weak bank ties—to assess investment sensitivity to liquidity. Investment is more liquidity‑sensitive among firms with weaker bank ties, underscoring the pivotal role of financial intermediaries.

Abstract

This paper presents evidence suggesting that information and incentive problems in the capital market affect investment. We come to this conclusion by examining two sets of Japanese firms. The first set has close financial ties to large Japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm. The second set of firms has weaker links to a main bank and presumably faces greater problems raising capital. Investment is more sensitive to liquidity for the second set of firms than for the first set. The analysis also highlights the role of financial intermediaries in the investment process.