Financial Turbulence and the Japanese Main Bank Relationship

Under the Japanese “main bank” relationship, a bank holds equity in a firm and plays a leading role in its decision-making and financing. This may leave a firm dependent on its main bank for financing due to its information advantage over other potential lenders. This dependency may be particularly severe during episodes of financial turbulence. We examine the sensitivity of returns on portfolios of Japanese firm equity to the returns of their main banks using a three-factor arbitrage-pricing model. We find no significant dependence when coefficient values are held constant over the entire sample. However, the data strongly suggest a structural break in the relationship subsequent to the last quarter of 1997, a turbulent period for Japanese financial markets. When a structural break is introduced, main bank sensitivity increases after the break, usually to significantly positive levels.