Effects of Corporate Profitability and Growth on the Shareholding Strategies of Banks: Evidence from Japan

Abstract

This study scrutinised whether the profitability indexes of firms and the costs associated with product creation as reflections of growth potential affect the percentage of shareholding that Japanese banks acquire from Japanese client companies. To this end, multiple regression analysis was conducted on a sample of 302 firms on which 2,231 observations were made over the fiscal years 2006 to 2015. The findings indicated that the principle of shareholding alone does not drive banks to secure shares in client companies. Instead, the standard that prompts share acquisition is whether management is efficiently operating company business. The implication of this study is that a bank’s shareholding strategy requires client companies to implement management with an awareness of corporate governance, whose significance lies in advancing the realisation of returns from corporate activities by lenders and/or shareholders. In other words, banks are motivated to hold shares when client companies are highly profitable and efficient. Even under these conditions, a bank carries on serving as the financial institution with which a client company is primarily affiliated. As a main bank, a given financial institution seems to consider the pursuit of long-term corporate profits through the research and development of a client firm. However, whether banks will continue to seek such profits from client companies is doubtful.