Original Article
Debt covenants in Japanese loan markets: in comparison with the traditional relationship banking
First published: 13 November 2019
We thank the Editor, anonymous reviewers, James Routledge, Makoto Nakano, Hironori Fukukawa, Tetsuyuki Kagaya, Akinobu Shuto, Souhei Ishida, and participants in research workshops at Hitotsubashi University and the University of Tokyo. We also appreciate the advice and suggestions from professors at National Taipei University and the University of Indonesia and participants of the 6th International Accounting Conference. We both gratefully acknowledge the financial support from the Grant‐in‐Aid for Scientific Research from the Ministry of Education, Culture, Sports, Science, and Technology of Japan (ID: 16K17214; 15K17165). All errors in this paper are our own.
Abstract
This study investigates determinants of debt covenants in Japanese loan markets. We focus on a unique monitoring mechanism by Japanese banks and hypothesise that debt covenants substitute for the traditional main bank governance. Consistently, we find that debt covenants are less likely to be used for firms with stronger ties with their main banks. We also document that such use of debt covenants results in borrower’s upward earnings management. Overall, our evidence suggests that, in the Japanese context, debt covenants are used as a substitute for the main bank system yet they alone are an incomplete monitoring mechanism.
