On the Costs of a Bank‐Centered Financial System: Evidence from the Changing Main Bank Relations in Japan

TLDR

Liberalization of financial markets has reduced banks’ market power. The study examines how bank–firm relationships affect firm performance in Japan. Close bank ties raise capital availability but also increase firms’ cost of capital, do not improve profitability or growth, and seem to divert benefits to banks while discouraging risky investment.

Abstract

ABSTRACT We examine the effects of bank–firm relationships on firm performance in Japan. When access to capital markets is limited, close bank–firm ties increase the availability of capital to borrowing firms, but do not lead to higher profitability or growth. The cost of capital of firms with close bank ties is higher than that of their peers. This indicates that most of the benefits from these relationships are appropriated by the banks. Finally, the slow growth rates of bank clients suggest that banks discourage firms from investing in risky, profitable projects. However, liberalization of financial markets reduces the banks' market power.