What do cash holdings tell us about bank-firm relationships? A case study of Japanese firms

Abstract

This chapter examines the nature of bank-Firm relationships in Japan by investigating firms’ cash holding behavior based on a panel dataset of Japanese firms for the 2000s provided by Teikoku Databank. This dataset has the virtue of identifying firms’ main bank(s) or financial institution(s) with which they have a close relationship. This information is used to characterize the cash holding behavior of firms with varying degrees of closeness in their relationships with banks. The findings indicate that having a main bank relationship helps client firms in their cash management in two important ways. First, firms need to hold less cash for precautionary motives because main banks are ready to provide them with liquidity on a rainy day. Second, main banks can cushion shocks to client firms, so that client firms can keep the adjustment of cash holdings to such shocks to a minimum. However, client firms pay a price for maintaining long-term, stable relationships with main banks, namely, the monopoly rent imposed by main banks on their client firms in the form of a higher effective borrowing rate.