Bank Dependence and Financial Constraints on Investment: Evidence from the corporate bond market paralysis in Japan1

This paper investigates the causal relationship between firms ' bank dependence and financial constraints by utilizing the 2008 financial crisis and its impact on the Japanese economy as a natural experiment. Since the Japanese banking sector remained healthy while the corporate bond markets were paralyzed, firms that had reduced bank dependence were hit heavily by the shock. I examined whether firms with large holdings of corporate bonds maturing in 2008 were financially constrained, by comparing the changes in their investment expenditures and borrowing conditions with those of bank-dependent firms. The main empirical results show that (1) firms with large holdings of corporate bonds maturing in 2008 did not cut investment expenditures; (2) instead, they observed higher increments in bank loans; and (3) firms that maintained relatively close bank-firm relationships had more access to bank loans with low borrowing costs, but significant differences in investment expenditures were not found. These findings imply that although there is a cost to reducing bank dependence, it is not very high for Japanese listed firms