Does competition from new equity mitigate bank rent extraction? Insights from Japanese data

Understanding the rise and decline of the Japanese main bank system: The changing effects of bank rent extraction

“…Wu et al (2009) also show that firms with very high growth potential tended to use more bank loans than public debt. But this occurs when rent extraction is low.…”

“…Wu et al (2009) have recently shown that Japanese firms with better growth prospects tended to use more external finance through either bonds or equity and that among them, those with relatively stable earnings (usually arising from assets-in-place) were able to issue bonds or public debt, consistent with the holdup argument of Rajan (1992). Since only a certain type of firm is able to issue bonds, the existence of public debt does not in reality undermine the main result that there was a downside risk bias against bank debt due to the banks' rent extraction.…”

Do Market Imperfections Give Rise to Financial Constraints? A Growth Type Explanation for the Sensitivity of Investment to Cash Flow

“…One implication is that despite big information gaps, high growth firms can use new equity as a natural curb on banks' rent extraction, about which the information production argument for monitored debt or bank financing has been silent (Wu, Sercu and Yao [2009]). Thus, the type of asymmetric information (about assets-inplace versus growth) matters to the financing pecking order.…”

International variations in expected equity premia: Role of financial architecture and governance

“…This view is supported by Bhattacharya and Thakor (1993) who suggest that a unifying thread among a great number of papers on banking is that ''intermediation is a response to the inability of market-mediated mechanisms to efficiently resolve informational problems.'' Further, banks can extract rent for their monitoring function, but such rents are limited by the availability of new equity in better developed financial markets (Wu et al, 2009). Modigliani and Perotti (2000) theorize that when societies' enforcement regimes are not adequate, bank financing is favored.…”

“…For example, Wu et al (2009) evidence an association of market development (in the sense of support for new equity) and the ability of banks to extract rents. Berg and Kaserer (2010) model estimates of equity premia from credit-default swap (CDS) spreads.…”