The Real Effects of Bank-Driven Termination of Relationships: Evidence from Loan-level Matched Data

Nakashima, Kiyotaka and Takahashi, Koji (2018): The Real Effects of Bank-Driven Termination of Relationships: Evidence from Loan-level Matched Data. Forthcoming in: Journal of Financial Stability

Abstract

In this study we use a matched dataset of Japanese banks and firms to examine how bank-driven terminations of bank-borrower relationships affect the investments of the borrowers. We find that bank-driven terminations significantly decrease investment, exerting an effect that exceeds that due to credit reductions within continuing relationships. Our results also show that the unwanted effect of bank-driven terminations grows as the loan market deteriorates as a whole, which prevents firms from obtaining funding from other sources after their relationships with banks are terminated. Our findings coincide with previous literature emphasizing financial frictions in the matching process and the importance of relation-specific assets in credit markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: matched lender--borrower data, relationship termination, search frictions, asymmetric information problems, relationship switching.
• Subjects: G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

Amiti, M, and D. Weinstein, 2011, Exports and Financial Shocks, The Quarterly Journal of Economics, 126, 1841--1877.

Amiti, M., and D. Weinstein, 2018, How Much Do Idiosyncratic Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data, Journal of Political Economy, 126, 525--587.

Arellano, M., and S. Bond, 1991, Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations, Review of Economic Studies, 58, 277--297.

Berger, A., and G. Udell, 1995, Relationship Lending and Lines of Credit in Small Firm Finance, Journal of Business, 68, 351--381.

Bernanke, B., and M. Gertler, 1989, Agency Costs, Net Worth, and Business Fluctuations, American Economic Review, 79, 14--31.

Bernanke, B., and M. Gertler, 1990, Financial Fragility and Economic Performance, The Quarterly Journal of Economics, 105, 87--114.

Bernanke, B., and C. Lown, 1991, The Credit Crunch, Brookings Papers on Economic Activity, 2, 205--239.

Berrospide, J., and R. Edge, 2010, The Effects of Bank Capital on Lending: What Do We Know, and What Does it Mean? International Journal of Central Banking, 6, 5--54.

Becsi, Z., Li, V.E. and Wang, P., 2005. Heterogeneous Borrowers, Liquidity, and the Search for Credit. Journal of Economic Dynamics and Control, 29(8), 1331-1360.

Becsi, Z., Li, V.E. and Wang, P., 2013. Credit Mismatch and Breakdown. European Economic Review, 59, 109-125.

Blundell, R. and Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of econometrics, 87(1), 115-143.

Caballero, R., T. Hoshi, and A. Kashyap, 2008, Zombie Lending and Depressed Restructuring in Japan, American Economic Review, 98, 1943--1977.

Calomiris, C., and B. Wilson, 2004, Bank Capital and Portfolio Management: The 1930's Capital Crunch" and the Scramble to Shed Risk, Journal of Business, 77, 421--455.

Carlson, M., H. Shan, and M. Warusawitharana, 2013, Capital Ratios and Bank Lending: A Matched Bank Approach, Journal of Financial Intermediation, 22, 663--687.

Carvalho, D., M. Ferreira, and P. Matos, 2015, Lending Relationships and the Effect of Bank Distress: Evidence from the 2007-2009 Financial Crisis, Journal of Financial and Quantitative Analysis, 50, 1165--1197.

Chava, S., and A. Purnanandam, 2011, The Effect of Banking Crisis on Bank-Dependent Borrowers, Journal of Financial Economics, 99, 116--135.

Chodorow-Reich, G., 2014, The Employment Effects of Credit Market Disruptions: Firm-level Evidence from the 2008-9 Financial Crisis, The Quarterly Journal of Economics, 129, 1--59.

Davidson, R., and J. MacKinnon, 2014, Confidence Sets based on Inverting Anderson--Rubin tests, The Econometrics Journal, 17, 39--58.

Degryse, H., and S. Ongena, 2005, Distance, Lending Relationships, and Competition, Journal of Finance, 60, 231--266.

Dell'Ariccia, G., and P. Garibaldi, 2005, Gross Credit Flows, Review of Economic Studies, 72, 665--685.

Den Haan, W., G. Ramey, and J. Watson, 2003, Liquidity Flows and Fragility of Business Enterprises, Journal of Monetary Economics, 50, 1215--1241.

Fukao, M, 2003, Financial Sector Profitability and Double Gearing. In: Blomstrom, M., J. Corbett, F. Hayashi, and A. Kashyap (Eds.), Structural Impediments to Growth in Japan, University of Chicago Press, Chicago.

Gan, J, 2007a, The Real Effects of Asset Market Bubbles: Loan- and Firm-level Evidence of a Lending Channel, Review of Financial Studies, 20, 1941--1973.

Gan, J, 2007b, Collateral, Debt Capacity, and Corporate Investment: Evidence from a Natural Experiment, Journal of Financial Economics, 85, 709--734.

Gertler, M., and N. Kiyotaki, 2010, Financial Intermediation and Credit Policy in Business Cycle Analysis. In: Friedman, B., and M. Woodford, (Eds.), Handbook of Monetary Economics. Vol. 3, North-Holland, New York.

Gibson, M, 1997, More Evidence on the Link between Bank Health and Investment in Japan, Journal of the Japanese and International Economies, 11, 296--310.

Guizani, B., and W. Watanabe, 2016, The Effects of Public Capital Infusions on Banks' Risk-Shifting to the Deposit Insurance System in Japan, Journal of Financial Stability, 26, 15--30.

Holmstr\"{o}m, B., and J. Tirole, 1997, Financial Intermediation, Loanable Funds and The Real Sector, The Quarterly Journal of Economics, 112, 663--691.

Hoshi, T., 2001, What Happened to Japanese Banks? Monetary and Economic Studies, 19, 1--29.

Hoshi, T., and A. Kashyap, 2004, Japan's Financial Crisis and Economic Stagnation, Journal of Economic Perspective, 18, 3--26.

Ioannidou, V., and S. Ongena, 2010, ``Time for a Change": Loan Conditions and Bank Behavior when Firms Switch Banks, Journal of Finance, 65, 1847--1877.

Ito, T., and Y. Sasaki, 2002, Impacts of the Basel Capital Standard on Japanese Banks, Journal of the Japanese and International Economies, 16, 372--397.

Kang, J., and R. Stulz, 2000, Do Banking Shocks Affect Borrowing Firm Performance? An Analysis of the Japanese Experience, Journal of Business, 73, 1--23.

Leary, M., 2009, Bank Loan Supply, Lender Choice, and Corporate Capital Structure, Journal of Finance, 64, 1143--1185.

Lummer, S., and J. McConnell, 1989, Further Evidence on the Bank Lending Process and the Capital-Market Response to Bank Loan Agreements, Journal of Financial Economics, 25, 99--122.

Miyakawa, D., 2010, How Does the Loan Relation Depend on its Duration? Evidence from Firm- and Bank-Level Data, mimeo.

Montgomery, H., 2005, The Effect of the Basel Accord of Bank Portfolios in Japan, Journal of the Japanese and International Economies, 19, 24--36.

Nakashima, K., 2016, An Econometric Evaluation of Bank Recapitalization Programs with Bank- and Loan-level Data, Journal of Banking and Finance, 63, 1--24.

Nakashima, K., and M. Saito, 2009, Credit Spreads on Corporate Bonds and the Macroeconomy in Japan, Journal of the Japanese and International Economies, 23, 309--331.

Nakashima, K., and K. Takahashi, 2018, The Time Has Come for Banks to Say Goodbye, mimeo.

Ongena, S., and D. Smith, 2001, The Duration of Bank Relationships, Journal of Financial Economics, 61, 449--475.

Ongena, S., G. T\"{u}mer-Alkan, and N. Westernhagen, 2012, Creditor Concentration: An Empirical Investigation, European Economic Review, 56, 830--847.

Peek, J., and E. Rosengren, 1995, The Capital Crunch: Neither a Borrower nor a Lender Be, Journal of Money, Credit and Banking, 27, 625--638.

Peek, J., and E. Rosengren, 2000, Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States, American Economic Review, 90, 30--45.

Peek, J., and E. Rosengren, 2005, Unnatural Selection: Perverse Incentives and the Allocation of Credit in Japan, American Economic Review, 95, 1144--1166.

Petrosky-Nadeau, N., and E. Wasmer, 2013, The Cyclical Volatility of Labor Markets under Frictional Financial Markets, American Economic Journal: Macroeconomics, 5, 193--221.

Petrosky-Nadeau, N., and E. Wasmer, 2015, Macroeconomic Dynamics in a Model of Goods, Labor, and Credit Market Frictions, Journal of Monetary Economics, 72, 97--113.

Rajan, R., 1992, Insiders and Outsiders: The Choice between Relationship and Arms Length Debt, Journal of Finance, 47, 1367--1400.

Sakai, K., I. Uesugi, and T. Watanabe, 2010, Firm Age and the Evolution of Borrowing Costs: Evidence from Japanese Small Firms, Journal of Banking and Finance, 34, 1970--1981.

Sakuragawa, M., and Y. Watanabe, 2009, Did the Japanese Stock Market Appropriately Price the Takenaka Financial Reform?, In: Ito, T., and A. Rose, (Eds.), Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, University of Chicago Press, Chicago.

Sharpe, S., 1990, Asymmetric Information, Bank Lending and Implicit Contracts: A Stylized Model of Customer Relationships, Journal of Finance, 45, 1069--1087.

Shrieves, R., and D. Dahl, 2003, Discretionary Accounting and the Behavior of Japanese Banks under Financial Duress, Journal of Banking and Finance, 27, 1219--1243.

Skinner, D., 2008, The Rise of Deferred Tax Assets in Japan: The Case of the Major Japanese Banks, Journal of Accounting and Economics, 46, 218--239.

Stock, J., and M. Yogo, 2005, Testing for Weak Instruments in Linear IV Regression, In: Andrews, D., and J. Stock, (Eds.), Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg, Cambridge University Press, Cambridge.

Tsuruta, D., 2014, Changing Banking Relationships and Client-firm Performance: Evidence from Japan for the 1990s, Review of Financial Economics, 23, 107--119.

Uchino, T., 2013, Bank Dependence and Financial Constraints on Investment: Evidence from the Corporate Bond Market Paralysis in Japan, Journal of the Japanese and International Economies, 29, 74--97.

Ueda, K., 2000, Causes of Japan's Banking Problems in the 1990s, In: Hoshi, T., and H. Patrick, (Eds.), Crisis and Change in the Japanese Financial System, Springer, New York.

von Thadden, E.-L., 1995, Long-Term Contracts, Short-Term Investment and Monitoring, Review of Economic Studies, 62, 557--575.

Wasmer, E., and P. Weil, 2004, The Macroeconomics of Labor and Credit Market Imperfections, American Economic Review, 94, 944--963.

Watanabe, W., 2007, Prudential Regulation and the Credit Crunch: Evidence from Japan, Journal of Money, Credit and Banking, 39, 639--665.

Woo, D., 2003, In Search of Capital Crunch: Supply Factors Behind the Credit Slowdown in Japan, Journal of Money, Credit and Banking, 35, 1019--1038.