,"Determinants of Long-term Loans: A Theory and an Empirical Evidence in Japan"

The purpose of this paper is to investigate what type of firm chooses long-term loans when the manager maximizes his expected payoff. Our theoretical model extends previous models in the following four respects. First, we allow the case where firms have internal funds. Second, we explicitly solve the conditions under which firms choose long-term debt. Third, we allow no information arrival for some lenders because it makes a pooling equilibrium more natural outcome. Fourth, we explicitly consider the case where there exists a chance of renegotiation for defaulted short-term debt. Our theoretical result shows that if a liquidation risk is present, the firm tends to choose long-term debt when it has large amount of external debt, when its average revenue is large, and when the manager has his own non-assignable control rent. It also shows that if there exists a chance of renegotiation, the firm tends to choose long-term debt when it has large amount of external debt and when its average revenue is small. We empirically investigate these hypotheses by using Japan's panel data for five industries. Except for the electric and electronic equipment industry, the results support our hypotheses for the case where a liquidation risk is present. However, in electric and electronic equipment industry, empirical results support our hypotheses for the case where there exists a chance of renegotiation. In addition, we support our hypotheses more significantly for the data of smaller companies and the data after financial liberalization.