Is Bank-Centered Corporate Governance Worth It? A Cross-Sectional Analysis of the Performance of Japanese Firms during the Asset Price Deflation

This paper examines the determinants of firm stock-price performance from 1990 to 1993" in Japan. During that period of time, the typical firm on the Tokyo Stock Exchange lost more" than half its value and banks experienced severe adverse shocks. We show that firms whose debt" had a higher fraction of bank loans in 1989 performed worse from 1990 to 1993. This effect is" statistically as well as economically significant and holds when we control for a variety of" variables that affect performance during this period of time. We find that firms that were more" bank-dependent also invested less during this period than other firms. This evidence points to an" adverse effect of bank-centered corporate governance, namely that firms suffer when their banks" are experiencing difficulties.