Do bank-firm relationships reduce bank debt? Evidence from Japan

The paper analyses how close relationships to banks influence a firm's choice of financing its debt through publicly marketed bonds or bank loans. It is shown that large Japanese firms use less bank debt, if banks own shares in the firm or bank employees are members of the firm's board. This result supports a theoretical framework, where banks are able to control agency problems associated with debt. Firms use bank loans in order to be monitored, which enables them to access cheaper bond finance. Closer bank-firm relationships facilitate monitoring for the bank and reduce therefore the need for bank finance.