Bank Equity Ownership and Corporate Hedging: Evidence from Japan

Posted: 12 Jun 2020

See all articles by Piman Limpaphayom

Piman Limpaphayom

Portland State University - School of Business Administration

Daniel A. Rogers

Portland State University - School of Business Administration

Noriyoshi Yanase

Keio University - Faculty of Business and Commerce

Date Written: 2019

Abstract

This study examines the relation between bank equity ownership and corporate hedging in Japan, an economy where banks are allowed, to a certain limit, to hold shares of firms to which they lend funds. The results show that bank equity ownership is positively related to the corporate usage of derivatives. We also find very little evidence that firm-level financial constraints affect derivatives usage. We further analyze the relation between derivatives usage and firm value to assess whether derivatives usage is driven by bank rent-seeking or speculative behavior. We find that derivatives usage is positively related to firm value providing support to the notion that bank equity ownership increases corporate hedging which, in turn, leads to high firm valuation. Robustness tests show that the relation between hedging and main bank equity ownership is not driven by endogeneity. In the end, our findings suggest that corporate hedging is driven by risk-averse incentives resulting from bank monitoring. We conclude that, in addition to relevant economic factors, ownership structure can also affect corporate hedging behavior.

Keywords: Bank Equity Ownership, Derivatives, Hedging, Firm Value, Japan

JEL Classification: G22, G32, G34

Suggested Citation

Limpaphayom, Piman and Rogers, Daniel A. and Yanase, Noriyoshi, Bank Equity Ownership and Corporate Hedging: Evidence from Japan (2019). Journal of Corporate Finance, Vol. 58, 2019, Available at SSRN: https://ssrn.com/abstract=3604544

Piman Limpaphayom

Portland State University - School of Business Administration ( email )

Portland, OR 97207-0751
United States

Daniel A. Rogers

Portland State University - School of Business Administration ( email )

P.O. Box 751
Portland, OR 97207-0751
United States
503-725-3790 (Phone)
503-725-5850 (Fax)

Noriyoshi Yanase (Contact Author)

Keio University - Faculty of Business and Commerce ( email )

2-15-45 Mita
Minato-ku
Tokyo 108-8345
Japan
1088345 (Fax)

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