This paper demonstrates the adjustment speed of firm working capital and the relationships between working capital and firm performance in Japan during the global financial crisis. Using quarterly firmlevel data, we find that the adjustment of working capital was weaker during the crisis. Moreover, the negative relationship between excess working capital and firm performance became more significant during the crisis, especially for larger firms. However, this crisis-related working capital-firm performance effect does not appear to persist for very long, because to finance any excess working capital, firms borrow from banks and reduce their internal cash both during and outside periods of crisis.
According to previous studies, a bank can set a higher interest rate for small firms by establishing a lending relationship since information asymmetry limits competition between banks. Therefore, the bank can acquire monopoly rent from small firms. However, if small firms can use trade credit which is another financial source, the bank cannot extract monopoly rent. In this article, we examine whether small firms can use trade credit if the bank sets a higher interest rate. Using panel data of small firms in Japan, our analysis shows that when the interest rate the bank sets is too severe or worsened for the borrower, the ratio of trade payables increases and the bank loses its amount of loans. This result implies that trade creditors alleviate the problems of bank information monopolies in Japan.
We investigate the relationship between leverage and firm performance using small business data from Japan by estimating the effects of leverage on both average firm performance and the variance of firm performance. We find that leverage has a negative effect on average firm performance and a positive effect on the variance of firm performance. This suggests that the problem of moral hazard is severe for highly leveraged firms. However, when highly leveraged firms have sufficient collateral assets, the effects of leverage are positive for average performance, but negative for the variance of performance. This implies that when small firms have sufficient collateral assets, highly leveraged businesses are better performers.
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