Reexamining the Relation between Debt Mix and Growth in Japan

44 Pages Posted: 20 Jan 2002

See all articles by Xueping Wu

Xueping Wu

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

Piet Sercu

FEB at KU Leuven

Jun Yao

Deakin University

Date Written: December 2001


We propose a U-shaped relation between the relative weight of bank loans in total corporate debt and the firm's market-to-book ratio-a proxy for expected growth-which reconciles most existing theories. Using data on Japanese firms for 1983-97, we do find that, in the lower range of growth spectrum, firms with better prospects take more bonds in their debt mix: when the firm's prospects improve, the benefits from private debt initially fall relative to its costs. In contrast, in the higher range of growth, firms with more growth potentials take more monitored debt, reflecting, amongst other factors, the higher information and contracting costs of public debt faced by extreme growers. We can explain the seemingly conflicting evidence that Anderson and Makhija (1999) and Hoshi, Kashyap and Scharfstein (1993) provide in this respect. We also find that keiretsu firms do not behave significantly different from non-keiretsu ones, suggesting that keiretsu firms are fairly independent in their financing decisions and that extra costs and benefits from bank loans are either small or in reasonable balance. Firms that faced restrictions in issuing bonds, pre-1990, continue to behave differently from other firms long after the restrictions were lifted.

Keywords: Bank Loan, Monitoring, Outside Debt, Debt Choice, Growth

JEL Classification: G32, G21

Suggested Citation

Wu, Xueping and Sercu, Piet M. F. A. and Yao, Jun Alex, Reexamining the Relation between Debt Mix and Growth in Japan (December 2001). Available at SSRN: or

Xueping Wu (Contact Author)

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

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


Piet M. F. A. Sercu

FEB at KU Leuven ( email )

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

Jun Alex Yao

Deakin University ( email )

Burwood, Victoria 3215

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