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Do firms benefit from multiple banking relationships? Evidence from small and medium- sized firms in Japan

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Abstract

This paper examines empirically the effects of multiple banking relationships on the cost and availability of credit. The analysis is based on an unbalanced panel data set for Japanese small and medium-sized firms over the period 2000–2002. The Hausman-Taylor estimator is used to allow for possible correlation between unobservable heterogeneity among firms and multiple banking relationships. The results suggest that the cost of credit is positively correlated with the number of banking relationships when the endogeneity of banking relationships is taken into account. Multiple banking relationships have a positive effect on the availability of credit for financially constrained firms.

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Notes

  1. For more details, see Allen and Gale (2000).

  2. The median number of banking relationships in Japan is seven for listed firms (Ogawa et al. 2007) and four for the SMEs in this paper.

  3. Ministry of Internal Affairs and Communications, 2006 Establishment and Enterprise Census of Japan. The number of enterprises here is the number of companies as defined under SME Basic Law plus the number of self-employed persons.

  4. The employment figure is calculated based on the 2006 Establishment and Enterprise Census of Japan, Ministry of Internal Affairs and Communications, while the value added figure is calculated from the 2007 Census of Manufactures, Ministry of Economy, Trade, and Industry.

  5. The lending share is calculated based on Loans and Discounts Outstanding by Sector at the end of 2002, Bank of Japan.

  6. The only exception is the study by Horiuchi (1994), which provides a descriptive investigation of the number of firms’ banking relationships by firm size based on survey data.

  7. A survey of more general issues regarding relationship banking is provided by Boot (2000).

  8. Other than the number of banking relationships, the strength of banking relationships is measured in various ways, such as the duration of a bank-firm relationship (Petersen and Rajan 1994, 1995; Cole 1998; Degryse and Van Cayseele 2000; Lehmann and Neuberger 2001) and the number of different services the firm purchases from the bank (Degryse and Van Cayseele 2000).

  9. This includes liquidity insurance by a relational bank in the event of financial distress. See Elsas and Krahnen (1998) on details of the role of housebanks in Germany and Hoshi et al. (1990) on main banks in Japan.

  10. A study that does relax the strict exogeneity assumption is D'Auria et al. (1999), which employs a within estimator to measure the effect of banking relationships on the interest rate of loans to large and medium-sized Italian firms.

  11. For more extended surveys on the determinants of multiple banking relationships including listed firms, see Neuberger et al. (2008) and Neuberger and Räthke (2009).

  12. It is difficult to construct measures for firms’ banking relationships for the period before 2002. In the JADE database, information on firms’ banks is updated every fiscal year. Therefore, the database does not hold information on the names of firms’ past banks. Another potential source of such information is Teikoku Data Bank Kaisha Nenkan published annually by Teikoku Data Bank. However, in this publication, not all bank information is provided because of space limitations. Moreover, Teikoku Data Bank keeps the Teikoku Data Bank Kaisha Nenkan only for a year after its publication. Thus, it is almost impossible to obtain data on SMEs’ banking relationships for the period before 2002. However, it is not unreasonable to assume that firms’ banking relationships are stable over a short period of time. The stability of banking relationships is checked by analyzing whether firms changed their first bank during the period 2002–2005. It is found that only 3% of the sample firms did so during this period, and there are few reasons to believe that such stability should not also be found in the period 2000–2002.

  13. The rationale for this approach is that it is impossible to calculate the q ratio for sample firms individually because the sample consists of small unlisted firms.

  14. In the case of a balanced panel, θ i is constant across firms and is omitted when computing firm-mean instruments. However, in the case of an unbalanced panel, θ i is not constant across firms and it is necessary to employ a firm-specific weighting scale parameter (Gardner 1998).

  15. Time invariant variables include, for example, a dummy for firms that are incorporated, industry dummies, and prefecture dummies. These variables do not vary throughout the sample period. The number of banking relationships and the dummy for government-affiliated financial institutions are considered to be time-invariant for the sample period since data are available only for the year 2002. However, the assumption that the number of banking relationships is time-invariant for the sample period is not that far removed from the actual nature of banking relationships of SMEs in Japan. For more details, see footnote 12. The other variables vary year by year and are considered to be time-variant variables.

  16. Previous studies using data on small and medium-sized firms in the U.S. define firms as constrained when they fall behind in their repayment of trade credits, because trade credits become the most expensive source of capital if repaid after the due date. In Japan, there is no discount or penalty rule in regard to the repayment of trade credits as in the U.S., where firms can get a substantial discount for early repayment.

  17. See Maddala and Nelson (1974), Ogawa and Suzuki (2000), and Atanasova and Wilson (2004) for details of the estimation procedure.

  18. See Gersovitz (1980), Ogawa and Suzuki (2000), and Atanasova and Wilson (2004) for the derivation of the probabilities of excess demand. Note that in this specification, firms that are financially constrained in year t are not necessarily financially constrained in other years.

  19. The reason why the lagged value of sales is used instead of total assets is that the latter is highly correlated with the predicted value of loan demand calculated from the previous estimation.

  20. The estimation results for the number of banking relationships and other variables remain the same when ln(number of branches of non-government banks) is replaced by the credit market concentration ratio defined as the lending share of the three largest banks in the prefecture. The coefficient on the credit market concentration ratio is positive and significant at the 1% level, suggesting that firms are charged higher interest rates in a concentrated credit market. This result is consistent with the results of Model I, implying that selection bias is not a serious problem.

  21. The estimation results for this specification are available from the author upon request.

  22. As mentioned above, a firm is defined as credit constrained in year t when the probability that the desired amount of bank credit in year t exceeds the maximum amount of credit available in the same year is greater than 0.5.

  23. The sample mean of the total outstanding loans/total assets ratio(t-1) is 38.63% for firms with a single banking relationship, but 41.98% for firms with multiple banking relationships, and this difference is statistically significant (t-value = −6.77).

  24. Several studies have found that the supply of small business lending decreases after a large bank has been involved in a merger or acquisition (e.g., Berger et al. 1998, Sapienza 2002).

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Authors and Affiliations

  1. Graduate School of Social Sciences, Hiroshima University, Higashisenda 1-1-89, Naka-ward, Hiroshima City, Hiroshima, 730-0053, Japan

    Masayo Shikimi

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Correspondence to Masayo Shikimi.

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Acknowledgments

I am grateful to Munehisa Kasuya, Yukinobu Kitamura, Gregory F. Udell, two anonymous referees, and other seminar and conference participants at the Bank of Japan, Hitotsubashi University, Musashi University, and the annual conference of the Japan Society of Monetary Economics for their valuable and helpful comments. I also thank Hiroyuki Okamuro for his kind support in obtaining the micro data used in this paper. However, any mistakes that remain are my own.

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Shikimi, M. Do firms benefit from multiple banking relationships? Evidence from small and medium- sized firms in Japan. Int Econ Econ Policy 10, 127–157 (2013). https://doi.org/10.1007/s10368-011-0196-x

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