Banking Relationships and Access to Equity Capital Markets: Evidence from Japan's Main Bank System
40 Pages Posted: 22 Jul 2003
Date Written: May 2003
We provide evidence that bears on the impact of deregulation that removes impediments to integration of investment banking and commercial banking functions. At issue is whether close relationships between commercial banks and investment banks give rise to conflicts of interest and enhanced bargaining power, or whether relationships enhance information production and dissemination. In particular, we are interested in whether close relationships increase capital market access for smaller, lesser-known firms. We approach these questions with a research design that purposefully generates a high likelihood of finding evidence of conflicts. In contrast to previous studies that examine debt or seasoned equity securities, we examine IPOs, which arguably are more information-intensive and subject to more severe conflict of interest problems. We use a sample of 484 Japanese IPOs over a time period characterized by extreme financial market distress. When firms in Japan go public, they can engage an investment banker who is related through a common main bank, or can select an alternative investment banker. The main bank relationship can be an efficient way for the investment bank to acquire information generated, but may give rise to conflicts. We use data from two different investment banking regimes in Japan (a hybrid auction-method regime and a book-building regime) to test the effects of main bank relationships on access to Japan's equity capital market, issue costs, and aftermarket performance. We find that main banking relationships give small issuers increased access to equity capital markets, but that issuers of large IPOs switch to non-related investment banks that are capable of managing large offerings. While we find evidence that investment banks seek to exploit bargaining power with related issuers, we also find that issuers respond to expected high issue cost by switching to non-related investment banks. The net result is that total issue costs through related and non-related investment banks are similar. With respect to aftermarket performance and use of offer proceeds, we find no evidence of conflict of interest or self-dealing for either the main bank or the investment bank.
JEL Classification: G21, G24, L22, L51
Suggested Citation: Suggested Citation