Bank Soundness and Cash Holdings: Evidence from a Bank-Centered Financial Market

40 Pages Posted: 20 Aug 2016 Last revised: 13 Nov 2017

See all articles by Toshinori Sasaki

Toshinori Sasaki

Toyo University - Faculty of Business Administration

Katsushi Suzuki

Hitotsubashi University - Graduate School of International Corporate Strategy

Date Written: September 22, 2017

Abstract

We examine how banks affect firms’ cash holdings by focusing on the soundness of banks in Japan, a bank-centered market, and we find that the deterioration of a banks’ soundness leads firms to save more cash from their cash flows. The deterioration of bank soundness decreases bank-dependent firm investment and firm value. Cash holdings of bank-dependent firms mitigate underinvestment problems and increase firm value. These effects are statistically and economically significant. These results, which are consistent with the financial constraint hypothesis and are inconsistent with the bank power hypothesis, imply that bank soundness renders firms financially constrained and affects firms’ cash holdings, investments and valuations in a bank-centered market.

Keywords: Cash holdings; Bank soundness; Cash-flow sensitivity of cash; Financial constraint; Bank power

JEL Classification: G21, G32

Suggested Citation

Sasaki, Toshinori and Suzuki, Katsushi, Bank Soundness and Cash Holdings: Evidence from a Bank-Centered Financial Market (September 22, 2017). Available at SSRN: https://ssrn.com/abstract=2826430 or http://dx.doi.org/10.2139/ssrn.2826430

Toshinori Sasaki (Contact Author)

Toyo University - Faculty of Business Administration ( email )

hakusan5-28-20
bunkyouku, Tokyo 112-8606
Japan

Katsushi Suzuki

Hitotsubashi University - Graduate School of International Corporate Strategy ( email )

2-1-2 Hitotsubashi
Chiyoda-ku,
Tokyo, 101-8439
Japan

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