Understanding the Rise and Decline of the Japanese Main Bank System: Corporate Investment and Financing under Bank Rent Extraction

摘要

While a close firm-bank relationship mitigates market imperfections, recent research has suggested that insider banks often impose ‘holdup’ costs. This paper presents a model of how main bank rent extraction affects corporate decisions about investment and financing. Our model predicts that main bank control tends to produce overinvestment by the client firm. This overinvestment, however, is contained by the shortage of bank capital, even when new equity is available to the firm. Abundant bank capital aggravates overinvestment to the detriment of firm profitability. The shift of control rights back to the firm causes the main bank’s holdup behaviour to backfire. The ex-ante rational bank is left financing projects with less upward potential and higher downside risk. This makes the bank’s assets more sensitive to shocks. Our model sheds light on why Japan’s main bank system was beneficial in the postwar (capital constrained) period, but became harmful during the (capital abundant) 1980s, and why the adverse shocks of the 1990s had such severe effects on the banking system.