Single Versus Multiple Main Bank Relationships: Evidence from Japan

Abstract

In this study, we investigate whether multiple main bank relationships reduce the so-called "hold-up costs" of bank financing (Rajan (1992)) by examining the panel data of Japanese companies listed on the Tokyo Stock Exchange, first and second sections during the period from 1991 to 1998. Our empirical results show that main bank borrowing is negatively related to the profitability of the firm, which suggests the significant presence of holdup costs. However, multiple main bank relationships reduce the holdup costs and lead to higher profitability. This mitigating effect of multiple main bank relationships is larger for firms with higher value of growth opportunities than firms with lower value of growth opportunities.

Keywords: Holdup Costs, Multiple Bank Relationships, Main Bank, Japanese Firms

JEL Classification: G32, G34