Dark-side evidence on bank-firm relationship in Japan

Kang and Stulz [Kang, J.K., Stulz, R.M., 2000. Do banking shocks affect borrowing firm performance? An analysis of the Japanese experience. Journal of Business 73, 1-23] find that firms which are more dependent on banks perform especially poorly during the early 1990s when Japan suffered a great economic shock. Examining the same period, this study provides further evidence on the dark side of a close bank-firm relationship. The results reveal that main banks try to stabilize their earnings by asking their closely controlled clients to over-borrow and over-invest. More specifically, we find a higher main bank power (MBP) is associated with higher loan ratio, higher interest payments, higher investment expenditure but worse firm performance.