Bank Size and Lending Relationships in Japan
Kobe University - Graduate School of Business Administration
Gregory F. Udell
Indiana University - Department of Finance
Osaka University - Institute of Social and Economic Research (ISER)
August 22, 2008
Journal of Japanese and International Economies, Vol. 22, No. 2, 2008
Current theoretical and empirical research suggests that small banks have a comparative advantage in processing soft information and delivering relationship lending. The most comprehensive analysis of this view found using US data that smaller SMEs borrow from smaller banks and smaller banks have stronger relationships with their borrowers [Berger, A.N., Miller, N.H., Petersen, M.A., Rajan, R.G., Stein, J.C., 2005. Does function follow organizational form? Evidence from the lending practices of large and small banks. J. Finan. Econ. 76, 237-269]. We employ essentially the same methodology as Berger et al. on a unique Japanese data set and find results that are quite interesting from an international comparison point of view. We find, like Berger et al. in the US, that larger firms tend to borrow from larger banks, and that smaller banks have stronger relationships with their borrowers. However, additionally we find that the former result is not due to larger firms being more transparent in terms of their financial statements. These results imply that although small banks' comparative advantage in relationship lending is likely to be universal, large banks may not necessarily have a comparative advantage in extending transactions-based lending.
Keywords: Banks, Small and medium enterprises, Relationship lending, Transactions-based lending, Japan
JEL Classification: G21, L22, G32, D82, D83Accepted Paper Series
Date posted: December 27, 2010
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