On the Costs of a Bank-Centered Financial System: Evidence from the Changing Main Bank Relations in Japan


  • David E. Weinstein,

    1. School of Management, University at Buffalo SUNY
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  • Yishay Yafeh

    1. School of Management, Hebrew University
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    • * Weinstein is at the University of Michigan Business School. Yafeh is at the Economics Department, the Hebrew University. We thank Lee Branstetter, Richard Caves, Brian Hall, Takeo Hoshi, Steve Kaplan, Saul Lach, Henry Rosovsky, Mark Ramseyer, David Scharfstein, Paul Sheard, Adrian Tschoegl, David Weil, Jeffrey Williamson, Oved Yosha, and two anonymous referees for helpful comments and suggestions. Fumio Hayashi kindly provided some of the data on tape, and Emily McNeal provided research assistance. We also would like to thank Hiroyasu Sugihara and Kazuyuki Suzuki for help with the JDB data. David Weinstein would like to thank the Zengin Foundation for Studies on Economics and Finance for partial support for this project. Yishay Yafeh gratefully acknowledges financial support from the Harvard Academy for International and Area Studies and the Falk Institute for Economic Research in Israel.


We examine the effects of bank–firm relationships on firm performance in Japan. When access to capital markets is limited, close bank–firm ties increase the availability of capital to borrowing firms, but do not lead to higher profitability or growth. The cost of capital of firms with close bank ties is higher than that of their peers. This indicates that most of the benefits from these relationships are appropriated by the banks. Finally, the slow growth rates of bank clients suggest that banks discourage firms from investing in risky, profitable projects. However, liberalization of financial markets reduces the banks' market power.