Bank Mergers, Loan Contracts, and Firm Performance: A Quasi-Experiment from Japanese Bank Mergers

Abstract

In this paper, we investigate the impact of bank mergers on the lending relationship and on client-firm performance. We study bank mergers that have occurred in Japan since 2000 and find that banks reduce the loan amounts for firms with which they have a close relationship and that banks’ cumulative shareholding by the pre-merger banks is non-linearly related to firms’ subsequent performance. Japanese banks are prohibited from holding more than 5% of a firm’s equity. This can be used as exogenous shock to investigate the linkage between the existence of blockholder and firm’s subsequent performance. We find that the cumulative equity stake held by pre-merger banks is non-linearly related to firms’ subsequent performance, and the kink point is 5%. Using the bank merger events and the 5% rule as the exogenous shock for blockholders, our findings have significant relevance in corporate governance debates.

Keywords: corporate governance, firm performance, bank merger

JEL Classification: G21, G30