Does Competition from New Equity Mitigate Bank Rent Extraction? Insights from Japanese Data

Journal of Banking and Finance, Forthcoming

14 Pages Posted: 14 Oct 2009

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Piet Sercu

FEB at KU Leuven

Jun Yao

Hong Kong Polytechnic University

Date Written: October, 11 2009

Abstract

Previous research shows that bank information production mitigates asymmetric information problems. However, this literature has ignored the concern that firms with better growth prospects are more vulnerable to bank rent extraction. This paper points out that funding competition from new equity as an effective natural mechanism solves this important concern. Using Japanese data from 1983 to 1997, we show that the relationship between loan-to-debt ratio and growth, while starting significantly negative (consistent with holdup theory), turns significantly positive towards the high end of the growth spectrum. We confirm that high growth firms raise more new equity than do low growth firms and use more equity relative to bonds in external finance. This is consistent with a generalized Myers-Majluf framework. These results suggest that for high growth firms, when competition from public debt lessens due to increased growth-based valuations, competition from new equity steps in to restrain bank rent extraction.

Keywords: debt mix, monitored debt, holdup, asymmetric information, growth, new equity

JEL Classification: G32, G21

Suggested Citation

Wu, Xueping and Sercu, Piet M. F. A. and Yao, Jun, Does Competition from New Equity Mitigate Bank Rent Extraction? Insights from Japanese Data (October, 11 2009). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1486962

Xueping Wu (Contact Author)

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
Belgium
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

Jun Yao

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

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