The choice of financing with public debt versus private debt: New evidence from Japan after critical binding regulations were removed

The complete removal of binding regulatory constraints on bond issuance till 1993 provides an opportunity ripe enough to test hypotheses on the choice of financing with public debt and bank debt, comparing with the partial deregulation of Japanese financial markets in the late 1980s. Regardless of further deregulation, there is a U-turning to bank debt in Japan's corporate financing as the 1990s’ recession prolonging. In particular, we find high quality Japanese firms leave banks to the bond market, while low quality firms U-turn to bank debt. We also provide new evidence that Japanese banks tend to lend loans to wealthy firms. Because of a shift from equity-linked bond to straight bond during 1993–1997, our study provides a complement to evidence on financing choices of equity-linked public debt versus bank debt with the late 1980s’ bull stock market.