Reexamining the Relation between Debt Mix and Growth in Japan

Abstract

Abstract. We propose a U-shaped relation between the relative weight of bank loans in total corporate debt and the firm's market-to-book ratio-a proxy for expected growth-which reconciles most existing theories. Using data on Japanese firms for 1983-97, we do find that, in the lower range of growth spectrum, firms with better prospects take more bonds in their debt mix: when the firm's prospects improve, the benefits from private debt initially fall relative to its costs. In contrast, in the higher range of growth, firms with more growth potentials take more monitored debt, reflecting, amongst other factors, the higher information and contracting costs of public debt faced by extreme growers. We can explain the seemingly conflicting evidence that Anderson and Makhija (1999) and Hoshi, Kashyap and Scharfstein (1993) provide in this respect. We also find that keiretsu firms do not behave significantly different from non-keiretsu ones, suggesting that keiretsu firms are fairly independent in their financing decisions and that extra costs and benefits from bank loans are either small or in reasonable balance. Firms that faced restrictions in issuing bonds, pre-1990, continue to behave differently from other firms long after the restrictions were lifted.

The Implications of Debt Heterogeneity for R&D Investment and Firm Performance

“…Dependent variables. Following prior research (Anderson & Makhija, 1999;Hoshi, Kashyap, & Scharfstein, 1993;Wu, Sercu, & Yao, 2001), we considered all bank loans to be relational debt and all bonds to be transactional debt. As Aoki and Patrick (1994) noted, a main bank leads a de facto lending syndicate and monitors firms on behalf of all other lenders, so it is appropriate to treat all bank loans as relational debt.…”

The Value Information of Financing Decisions and Corporate Governance during and after the Japanese Deregulation

“…Still other studies, again unlike this paper, concentrate mainly on a single aspect of the Japanese corporate governance and financing system. Hoshi, Kashyap and Scharfstein (1993), Anderson and Makhija (1999) and Wu, Sercu and Yao (2001) study the relations between the Japanese corporate debt mix choice and firm growth opportunities and find both benefits and costs of monitored debt. Morck, Nakamura and Shivdasani (2000) investigate how the value of a Japanese firm is linked to bank holdings in the firm and find that more bank holdings (with the ceiling of five percent in each firm as of 1987) tend to erode firm value.…”

“…They conclude that their evidence is inconsistent with the view of significant holdup costs of bank loans. In a recent study, Wu, Sercu and Yao (2001) use a theoretically sound U-shaped relation between the loan-to-debt ratio and corporate growth to reconcile the seemingly contradictory views about the costs and benefits of the Japanese corporate debt mix choice (monitored debt versus public debt) in relation to firms' growth.…”

Does debt heterogeneity impact firm value? Evidence from an emerging context

“…As the aforesaid sources of debt financing do not constitute a major portion of total debt for various firms (please refer to Appendix Table A1), the study groups them under a single variable so that the findings of the paper would help managers understand the importance of such categories of debt against bank borrowings. Moreover, there is a clear distinction between bank borrowings and other debt instruments established in the literature (Wu et al , 2001; Chun et al , 2011). The study thus examines how the classification of debt types can impact firm value in the Indian context.…”