Reduction of Interest-bearing Liabilities and Payout Policy by Japanese Companies

Since the 1990s, fund raising behavior of Japanese companies has significantly changed. We conducted empirical studies based on the companies listed on the First Section of the Tokyo Stock Exchange. Our findings can be summarized as follows. (i) The debt-equity ratio of companies with relatively high credit ratings has approached to an optimal level mainly by reducing bank borrowings. (ii) On the other hand, companies with relatively low credit ratings are still suffering from excess debt. Such companies have adjusted their debt-equity ratios by issuing new equity and/or convertible bonds when their share prices were in a rising phase as well as by reducing bank borrowings. (iii) Among companies that are estimated to have completed their excess debt adjustments, there are many that have preferred to further accumulate retained earnings, rather than effect fixed-capital spending and/or adopt a more active payout policy through dividends or stock repurchases. Main factors for such a cautious stance may be cited as follows. Due to lingering uncertainties over the economic outlook, corporate managers have a strong incentive to hoard cash at hand. Should earnings turn much better hereafter, however, companies, particularly those that have progressed debt reduction, may adopt a more active payout policy commensurate with their financial capacities.