Banks as lenders and shareholders: Evidence from Japan

This paper examines the effects of the main bank's equity–debt structure, (i.e., equity stakes and debt claims) on firm performance and financial policies in Japan over the period 1977–1987. Results show that firms with main bank equity stakes have lower performance than those without. However, among firms with main bank equity stakes, the equity–debt structure of claims has a positive effect on firm performance. The positive effect of the main bank's equity–debt structure is found to be greater in group-affiliated firms than in independent firms. The main bank maximizes its own interests by charging a higher interest rate when its equity stakes are relatively less than its debt claims and by prompting firms to pay more dividends when its equity stakes are relatively high.