Bank Intervention Risk and Investment : Evidence from Japan

We investigate hold-up problems in debt financing among publicly traded firms with apparently limited information asymmetries. Based on the prediction by Rajan (1992), we examine how changes in short-term bank loan ratio affect firm investment behavior. We confirm that, while investment by bank-dependent firms reduces with increasing ratio of short-term loans, this negative effect is mitigated or offset for firms with access to the public debt market. Consistent with Rajan (1992), this finding suggests that, as many Japanese firms lack access to the public market because of the absence of public debt issuance under the BBB rating, even publicly traded firms face potential hold-up problems in their relationships with banks. The results presented here help explain why firms without access to public debt have consistently lower investment rates than firms with such access, and suggest that the former face an underinvestment problem