Belief Updating on Bank Credit Availability and Cash Holdings

36 Pages Posted: 7 Sep 2019 Last revised: 1 Nov 2019

See all articles by Masanori Orihara

Masanori Orihara

University of Tsukuba

Yue Cai

Waseda University - Graduate School of Economics

Yoshiaki Ogura

Waseda University, Faculty of Political Science and Economics

Date Written: October 31, 2019

Abstract

Contrary to recent studies, we find that firms reduced cash holdings after experiencing financial distress, exploiting Japanese data from around the 2008 financial crisis. The reduction was long-lasting – for nearly ten years. The substitution between in-crisis borrowing and post-crisis cash holdings was one-to-one in the five years after the crisis. We attribute our finding to these firms’ rational belief updating on bank credit availability through their success in obtaining emergency loans, in line with the implicit insurance theory of relationship banking. We observe this negative association among firms which had the following characteristics prior to the crisis: above-median market-to-book-ratio, above-median cash holdings, and firms whose main bank had merged. Interestingly, firms received loans primarily from non-main banks. It suggests that they had diversified their pool of lenders to avoid a hold-up problem. Furthermore, these firms spent the excessive cash on equity investment in their affiliates through internal capital markets. Our paper highlights the critical role of the banking sector in mitigating the negative consequences of financially distressed experiences.

Keywords: Belief Updating, Financial Crisis, Cash Holdings, Relationship Banking

JEL Classification: G21, G31, G32

Suggested Citation

Orihara, Masanori and Cai, Yue and Ogura, Yoshiaki, Belief Updating on Bank Credit Availability and Cash Holdings (October 31, 2019). Available at SSRN: https://ssrn.com/abstract=3447083 or http://dx.doi.org/10.2139/ssrn.3447083

Yue Cai

Waseda University - Graduate School of Economics ( email )

1-6-1 Nishi-waseda, Shinjuku-ku
Tokyo
Japan

Yoshiaki Ogura

Waseda University, Faculty of Political Science and Economics ( email )

1-6-1 Nishi-waseda, Shinjuku-ku
Tokyo
Japan

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