Using micro data of Japanese banks and borrower firms, we construct an index measure that quantitatively describes the monitoring activities of Japanese banks. We examine the effects of bank monitoring on the profitability of borrower firms. We find significant positive effects in the periods...

We constructed measures representing the magnitude of Japanese banks' monitoring activities and tested two competing hypotheses about nature of banks' monitoring, (1) the monitoring improved profitability of borrowing firms and (2) it simply "screened" out unprofitable firms, by using the data...