Understanding the Rise and Decline of the Japanese Main Bank System: The Changing Effects of Bank Rent Extraction
55 Pages Posted: 15 Mar 2010
There are 3 versions of this paper
Understanding the Rise and Decline of the Japanese Main Bank System: The Changing Effects of Bank Rent Extraction
Understanding the Rise and Decline of the Japanese Main Bank System: The Changing Effects of Bank Rent Extraction
Understanding the Rise and Decline of the Japanese Main Bank System: The Changing Effects of Bank Rent Extraction
Date Written: March 15, 2010
Abstract
This paper shows how main bank rent extraction affects corporate decisions about investment and financing in a changing regulatory environment, and how an equity market boom can ominously increase bank risk during the transition from a relationship-oriented financial system to a transaction-based competitive system. Our model predicts that main bank control tends to produce overinvestment by the client firm. This overinvestment, however, is initially contained by the shortage of loanable funds, even when new equity is available to the firm. Abundant loanable funds facilitate overinvestment to the detriment of firm profitability. The shift of control rights back to the firm due to the financial deregulation undercuts the bank influence only to increase bank risk, because the ex ante rational bank is left financing projects with higher downside risk. The high-flying equity market further lowers costs of new equity and aggravates the “equity for growth and bank debt for downside risk” bias. This makes the bank harder than ever to diversify its risk. The insights of this paper help shed light on why Japan’s main bank system was beneficial in the postwar (capital constrained) period, but became harmful during the (capital abundant and bubble-laden) 1980s, and why the adverse shocks of the post-deregulation 1990s had such severe effects on the banking system.
Keywords: Main Bank, Rent Extraction, Investment Efficiency, Financing, Bank Risk
JEL Classification: G21, G28, G30, G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Optimal Investment, Growth Options, and Security Returns
By Jonathan Berk, Richard C. Green, ...
-
By Lu Zhang
-
A Cross-Sectional Test of a Production-Based Asset Pricing Model
-
Equilibrium Cross-Section of Returns
By Joao F. Gomes, Leonid Kogan, ...
-
Equilibrium Cross-Section of Returns
By Joao F. Gomes, Leonid Kogan, ...
-
Capital Investments and Stock Returns
By K.c. John Wei, Feixue Xie, ...
-
Capital Investments and Stock Returns
By K.c. John Wei, Feixue Xie, ...
-
Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns
By Murray Carlson, Adlai J. Fisher, ...
-
By Eugene F. Fama and Kenneth R. French