HIT-TDB-RIETI International Workshop on
the Economics of Interfirm Networks
November 29-30, 2012
What Do Cash Holdings Tell Us
about Bank-Firm Relationship?
The Case of Japanese Firms
Osaka University
Kazuo Ogawa
1.Motivation of the Study
Firms’ cash holdings are affected by bank-firm
relationship, especially main bank relationship
in Japan.
e.g. Jensen (1986), Dittmar et al. (2003),
Dittmar and Mahrt-Smith (2007),
Pinkowitz et al. (2006)
2
1. Firms affiliated with main banks can economize
cash holdings.
Main banks mitigate asymmetric information
between lenders and borrowers, relaxing external
financial constraints of affiliated firms and
decreasing firms’ demand for cash.
3
2. Sensitivity of cash to its determinants is lower
for affiliated firms.
Main banks may cushion external shocks to their
affiliated firms by providing bank credit, so that
firms do not have to adjust their cash holdings in
response to shocks.
4
3. Affiliated firms are forced to increase cash
holdings so that their main banks might exploit
monopoly rents.
Main banks can extract monopoly rents from
affiliated firms by requiring them to deposit back
part of the loans (compensating balance).
e.g. Pinkowitz and Williamson (2001)
5
The above discussions suggest that we can
infer the reality of bank-firm relationship by
analyzing the behavior of firms’ cash holdings.
6
2. Purpose of the Study
We uncover the true picture of the bank-firm
relationship in Japan by estimating the demand
equation of firms’ cash holdings, based on a
panel data of Japanese firms in the 2000s
provided by the Teikoku Databank Data
(TDD).
7
3. Features of the Study
We take advantage of the rich information on
the bank-firm relationship in the TDD.
In particular,
1) We can identify a firm’s “main bank,”
defined as the financial institution with
which the firm thinks has close relationship.
8
2) Financial transactions with main bank,
such as loans outstanding and time
deposits, are available.
9
4. Main Findings of the Study
1) The firms closely tied with their main banks
hold less cash.
2) The sensitivity of cash to cash flow, net
working capital and cash flow volatility is
smaller for the firms closely tied with their
main banks.
10
3) The firms closely tied with their main banks
pay higher “effective” borrowing rates that
reflect monopoly rents.
11
5. Empirical Strategy
We estimate the standard cash holdings
equation of firms by taking bank-firm
relationship explicitly into consideration.
12
Three motives for holding cash
1) Transaction motive
growth rate of real sales (GSALES)
sign
+
logarithm of real total assets (log(RTW) )
-
change in net working capital (NWC)
-
13
2) Precautionary motive
cash flow (CASHFLOW)
+
volatility of cash flow (SDCASHFLOW)
+
3) Agency motive
debt-asset ratio (DEBT)
-
To avoid higher cost of external finance, the debtridden firm will use cash to redeem debt.
14
bank debt/total debt (BANK DEBT)
main bank debt/total bank debt (MAINDEP)
Main banks provide liquidity for rainy days.
Main banks may extract monopoly rent by
forcing their affiliated firms to increase cash
holdings.
- or +
15
Effects of bank-firm relationship on cash holdings
1) When net working capital is scarce, short-term
loans will be provided by main banks.
2) Closer bank-firm relationship will mitigate
external financial constraints, so that sensitivity
of cash to cash flow and its volatility will be
lowered.
16
3) Higher debt-asset ratio does not necessarily
raise the cost of external finance under close
bank-firm relationship
Cash
determinants
NWC
CASHFLOW
SDCASHFLOW
DEBT
BANK DEBT
MAINDEP
Bank-firm relationship
weak
strong
sensitivity of cash
large
small
large
small
large
small
large
small
level of cash holdings
negative or positive
17
6. Data Set and Descriptive Statistics of
Cash Holdings
 The TDD is a huge data set of about 400,000
Japanese firms constructed in cooperation
with the Teikoku Databank Ltd., the largest
credit information provider in Japan.
18
 The TDD contains rich information of bankfirm relationship as well as firms’ basic
attributes and financial statements.
The firms’ financial statements are available
from 2001-2009 but the detailed information
of bank-firm relationship is available only
from 2007-2010.
19
 Descriptive statistics of cash holdings
0.17
0.6
0.165
0.59
0.16
0.58
0.155
0.57
0.15
0.56
0.145
0.55
2001
2002
2003
2004
cash/asset ratio
2005
2006
2007
bank debt/total debt
2008
2009
20
bank debt/total debt ratio
cash/asset ratio
Cash/Asset Ratio and Bank Debt/Total Debt Ratio: Sample Median
Cash/Asset Ratio by Firm Size
0.22
0.21
0.2
0.19
0.18
0.17
0.16
0.15
0.14
0.13
2001
2002
2003
2004
2005
large
2006
2007
2008
2009
small
21
Cash/Asset Ratio by Bank Dependence
0.22
0.21
0.2
0.19
0.18
0.17
0.16
0.15
0.14
0.13
2001
2002
2003
2004
2005
bank-dependent
2006
2007
2008
2009
independent
22
Cash/Asset Ratio by Cash Flow Volatility
0.22
0.21
0.2
0.19
0.18
0.17
0.16
0.15
0.14
0.13
2001
2002
2003
2004
2005
laege
2006
2007
2008
2009
small
23
 Descriptive statistics of main bank relationship
Histogram of Number of Main Banks: 2008
70
64.7
60
50
%
40
30
27.1
20
10
7
1
0.2
3
more than 3
0
0
1
2
number of main banks
number of sampled firms= 282257
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Cash/asset ratio and main bank relationship
Number of main banks
Bank-dependence
0
1
more than
one
Bank-dependent
0.1725
0.1364
0.1697
Independent
0.1770
0.1578
0.1754
25
7. Estimation Results and Implications
Dependent variable: A change in cash holdings
divided by total assets
Panel estimation for the whole sample period
(2001 – 2009; Table 5)
All the explanatory variables have the coefficient
estimates consistent with the theory and they are
statistically significant at the 1% level.
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Sample separation by bank debt/total debt
Bank-dependent
NWC
CASHFLOW
SDCASHFLOW
DEBT
BANK DEBT
Adjusted R2
# of observations
Model
-0.1704***
0.1952***
0.0394***
-0.0990***
-0.0625***
0.0791
47981
fixed
Independent
-0.3734***
0.3602***
0.1088***
-0.1020***
-0.0360***
0.1782
48929
fixed
Cash holdings are less sensitive to net working
capital, cash flow and cash flow volatility for
bank-dependent firms.
Bank-dependent firms hold less cash.
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The above evidence remains essentially intact
even if IV estimation is applied to the firstdifferenced model (Table 6).
Panel estimation for the sub-sample period
(2007 – 2009; Table 9 )
Sample separation into six firm groups
classified by the number of main banks and the
bank debt/total debt ratio
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No main bank
Bank-dependent
Independent
NWC
CASHFLOW
SDCASHFLOW
DEBT
BANK DEBT
MAINDEP
Adjusted R2
# of observations
Model
NWC
CASHFLOW
SDCASHFLOW
DEBT
BANK DEBT
MAINDEP
Adjusted R2
# of observations
Model
One main bank
Bank-dependent
-0.0931
0.2682
-0.4211
0.1154
-0.0550
-------0.0189
1208
fixed effect
-0.4079***
0.5382***
-0.2217
-0.3861***
0.0715
--------0.0850
1178
fixed effect
One main bank
Independent
More than one main bank
Bank-dependent
Independent
-0.3355***
0.3159***
0.3287***
-0.1418***
-0.0062***
-0.0092
0.0827
8641
fixed effect
-0.1341***
0.2805***
-0.4632**
-0.0526
-0.2024***
0.0041
0.0231
1837
fixed effect
-0.0848***
0.1045***
-0.0696
-0.1667***
-0.0903***
-0.0284***
0.0397
9290
fixed effect
-0.3714***
0.4941***
0.4078***
-0.1272
-0.0292
-0.0044
0.0941
1833
fixed effect
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When main bank relationship is the closest,
sensitivity of cash to net working capital, cash
flow and cash flow volatility is least among
the six firm groups.
Main bank’s loan share decreases cash/asset
ratio only for the firm group with the closest
main bank relationship.
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Sensitivity of cash holdings to net working
capital and cash flow is largest for the
independent firms with no main bank and
second largest for the independent firms with
more than one main bank.
Sensitivity of cash to debt-asset ratio is largest
for the independent firms with no main bank.
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Do main banks extract monopoly rents from their
affiliated firms?
Difference between “ effective” borrowing rate
*
L
r and nominal rate rL is a proxy of monopoly rents.
rL BL − rD D
r =
BL − D
*
L
BL : borrowing from main bank
D : deposit in main bank
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Histogram of monopoly rent
Bank-dependent firms with one main bank
30
25.4
22.8
25
21.1
%
20
15
9.8
10
5.2
5.7
5.3
5
2.3
2.2
0
0-10
10-25
25-50
50-75
75-100 100-150 150-200 200-500
500-
basis points
number of observations =1558
Independent firms with one main bank
25
19.9
20
15.2
17.3
%
15
10.4
7.9
10
9.6
7.8
8.1
3.8
5
0
0-10
10-25
25-50
50-75
75-100 100-150 150-200 200-500
basis points
number of observations = 1561
500-
33
Bank-dependent firms with more than one main bank
27.8
30
23.8
25
17.8
%
20
15
12
10
5
5
4.6
4.8
2.4
1.8
0
0-10
10-25
25-50
50-75
75-100 100-150 150-200 200-500
basis points
number of observations = 500
500-
Independent firms with more than one main bank
25
20
19.7
17.6
18.9
%
15
9.6
10
7.9
5.4
5
7.9
8.1
4.9
0
0-10
10-25
25-50
50-75
75-100 100-150 150-200 200-500
basis points
number of observations = 533
500-
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Regression of effective borrowing rate on
MAINDEP
adjusted R2
model
# of observations
Constant
MAINDEP
Bank-dependent
one main bank
0.0076***
-0.0024*
0.0032
1420
random
effect
Independent
one main bank
0.0127***
-0.0021
0.0014
1401
random
effect
Bank-dependent
more than one main bank
-0.0070
0.0006
407
fixed
effect
Independent
more than one main bank
0.0139***
0.0051
454
random
effect
0.0193**
-0.0050
35
 We detect monopoly rents for four firm groups
with main bank relationship.
Furthermore, main banks’ share of loans is
significantly positive for the bank-dependent
firm group with more than one main bank.
36
8. Concluding Remarks
Summary of our findings
1. Affiliated firms can economize cash holdings
since main banks are ready to provide them with
liquidity for rainy days.
2. Main banks may cushion external shocks to
affiliated firms, so that sensitivity of cash to
shocks is smaller for the affiliated firms.
37
3. Affiliated firms have to pay the price for
maintaining the stable bank-firm relationship as
monopoly rent.
Agenda for future research
The benefit of maintaining long-term bank-firm
relationship relative to the cost should be
evaluated quantitatively.
38