| The banking literature has argued that close bank ties can mitigate asymmetric information and moral hazard problems that afflict public capital markets. However, there is evidence that banks operating in regulated capital markets may extract rents from client firms. This dissertation empirically examines Japanese firm-bank relationships over the 1980–96 period, and challenges the traditional view on the efficacy of bank monitoring. The overall results suggest that major Japanese banks used their market power to extract rents, and the positive role of “main bank” affiliation documented in earlier empirical research has been exaggerated.; The first chapter uses the bond issuing criteria in the 1980's in an investment-Q theory framework to re-examine whether bank affiliated firms enjoyed better access to capital. Investment-cash flow sensitivity was lowest for bond restricted firms, a result at odds with standard predictions. However, restricted firms were relatively bank-dependent, making these results consistent with previous empirical work. The incorporation of a standard bank affiliation variable, however, leads to a larger spread in sensitivity for affiliated firms, and is consistent with the rent extraction hypothesis.; Chapter two more directly tests the influence of bank affiliation on firm performance by incorporating firm-bank specific relationship variables into a standard empirical framework. These measures entered negatively in regressions where the dependent variable was a firm performance metric. In contrast to established theory, there is no empirical evidence that bank affiliation reduced firm risk.; It is well established that real estate lending played an important role in the 1980's asset market appreciation in Japan. An important question is whether banks (and other market participants) recognized the riskiness of land ex ante. The third chapter documents the positive correlation between land intensity and firm-specific beta coefficients in an empirical implementation of a synthesized APT-CAPM asset pricing model. This same relationship is not found for other asset types. The chapter provides evidence that market participants recognized land's riskiness prior to the land price collapse, and suggests that Japanese bank's excessive land exposure may have resulted from corporate governance problems. |
