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Main bank relationship and accounting conservatism: evidence from Japan

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Abstract

In a market-oriented economy like the USA, the process of monitoring through lending mitigates lenders’ demand for accounting conservatism. Japanese corporate governance is characterized as a bank-dominated or relationship-oriented system. Under bank-dominated systems, main banks are expected to be effective monitors. In our model, main banks play the role of reducing the lenders’ demand for accounting conservatism by reducing information asymmetry. We find that main banks can reduce the demand for accounting conservatism. Our findings help understand accounting conservatism vis-à-vis agency problems. We provide empirical evidence to contribute to literature on banking, specifically to fields such as relationship banking.

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Notes

  1. In family firms, Chen et al. (2014) show that conservative accounting is pronounced by the founding CEO ownership because they have the incentive to reduce risk of potential litigation and agency costs consistent with Watts (2003a, b). On the other hand, the presence of foreign institutional shareholders would be enhanced in East Asian Countries (Chung et al. 2019). These studies imply that the one who demands conservatism might depend on the difference in the corporate ownership structure.

  2. On the advices of an anonymous reviewer’s comment, we discuss about the effectiveness of main bank monitoring in 2000s. Arikawa and Miyajima (2015) themselves pointed out that main bank relationships have been maintained post bubble-bursting. In addition, they pointed out that main bank relationships have been helpful in restructuring borrowing firms suffering from financial distress. Furthermore, empirical papers showed that main bank lending relationships have performed to mitigate information asymmetry (Sakawa et al. 2014) and decrease the degree of underpricing of IPO firms (Sakawa and Watanabel 2019). Thus, we conclude that the main bank relationships have still been functioned in 2000s.

  3. The roles of main banks differ based on financial conditions. Sheard (1994) summarizes their roles in the phase of financial distress of their client firms and shows the main banks’ involvement in restructuring listed firms.

  4. Our sample period starts in 2007 when the banks in Japan faced a recovery period after the corruption of non-performing loan problems (Hoshi and Kashyap 2006). Especially, main mega banks’ M&A have ended during the year 2006 (Sakawa and Watanabel 2018a). In 2015, the corporate governance code was introduced and main bank stakes would have been weakened. Therefore, we set the ending period in 2014.

  5. Following the studies of Erkens et al. (2014) in the U.S., and Shuto and Takada (2010) in Japan, we used Basu (1997)’s conditional conservatism model in this paper. Accounting conservatism is defined as an asymmetric verification standard for recording good news as gains, rather than for recording bad news as losses. The above definition implies conditional conservatism as measured by the asymmetric timeliness of earnings and it is not consistent with the definition of unconditional conservatism (Shuto and Takada, 2010). Furthermore, Roychowdhury and Watts (2007) stated the validity of Basu (1997)’s model. Thus, we use Basu (1997)’s specification of the measure of asymmetric timeliness of earnings to examine the association between main bank relationships and accounting conservatism.

  6. On the advises of an anonymous reviewer’s comment, we changed the numerator of bank lending from all bank loans to all bank loans minus loans from the main bank to check for possible different roles of main banks and other commercial banks. Furthermore, we also adopted the main bank lending ratio as a proxy for bank lending relationships and checked the robustness of the results. We confirmed that the coefficient (\({{\upbeta }}_{7}\)) is also significantly negative, consistent with Hypothesis 1 by un-tabulated results.

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Acknowledgement

We would like to thank for Guest Editor Derek Lehmberg and Shige Makino. Earlier version of this paper was presented at 2018 annual conference of AJBS (Academy of Japanese Business Study), AIB (Academy of International Business), and AAA (American Accounting Association). We also thank for Allan Bird, James Hagen, Tom Roehl, Fumiko Takeda, Jason Talakai, and Kazuhiko Yoshikawa for their comments on earlier drafts, which helped improve this article. This study is financially supported by the Grant-in-Aid for Young Scientists (A) (MEXT/JSPS KAKENHI Grant Number 17H04784), the Grant-in-Aid for Scientific Research (C) (MEXT/JSPS KAKENHI Grant Number 17K03695), and the Grant-in-Aid for Scientific Research (B) (MEXT/JSPS KAKENHI Grant Number 17KT0036). All remaining errors are solely our owns.

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  1. Graduate School of Economics, Nagoya City University, 1 Yamanohata, Mizuho-cho, Mizuho-ku, Nagoya, 467-8501, Japan

    Hideaki Sakawa & Naoki Watanabel

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  1. Hideaki Sakawa
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  2. Naoki Watanabel
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Correspondence to Hideaki Sakawa.

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Table 9 Variable definitions
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Sakawa, H., Watanabel, N. Main bank relationship and accounting conservatism: evidence from Japan. Asian Bus Manage 19, 62–85 (2020). https://doi.org/10.1057/s41291-019-00071-5

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