MAIN BANK RELATIONSHIPS AND CAPITAL STRUCTURE IN JAPAN

In this paper, we argue that the main bank in Japan acts as a quasi-in side monitor of the firm, delegated by other lenders, and that main ba nk relationships increase the debt capacity of the firm by reducing th e agency cost of debt. On the other hand, firms with high debt ratios will strengthen main bank relationships due to the agency problems ass ociated with high leverage. Thus, the debt ratio and main bank relatio nships are simultaneously determined and have positive effects on each other. The empirical results we obtain support these hypotheses. J. J apan. Int. Econ. September 1996, 10(3), pp. 250-261. Department of Eco nomics, Kyoto Sangyo University, Kamigamo, Kitaku, Kyoto 603, Japan; a nd Department of Business Administration and Information, Setsunan Uni versity, Ikedanakamachi, Neyagawa, Osaka 572, Japan. (C) 1996 Academic Press.