Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/21111
Title: Does competition from new equity mitigate bank rent extraction? Insights from Japanese data
Authors: Wu, X
Sercu, P
Yao, J 
Keywords: Asymmetric information
Debt mix
Growth
Holdup
Monitored debt
New equity
Issue Date: 2009
Publisher: Elsevier
Source: Journal of banking and finance, 2009, v. 33, no. 10, p. 1884-1897 How to cite?
Journal: Journal of banking and finance 
Abstract: Previous research shows that bank information production mitigates asymmetric information problems. However, this literature has ignored the concern that firms with better growth prospects are more vulnerable to bank rent extraction. This paper points out that funding competition from new equity as an effective natural mechanism solves this important concern. Using Japanese data from 1983 to 1997, we show that the relationship between loan-to-debt ratio and growth, while starting significantly negative (consistent with holdup theory), turns significantly positive towards the high end of the growth spectrum. We confirm that high-growth firms raise more new equity than do low growth firms and use more equity relative to bonds in external finance. This is consistent with a generalized Myers-Majluf framework. These results suggest that for high growth firms, when competition from public debt lessens due to increased growth-based valuations, competition from new equity steps in to restrain bank rent extraction.
URI: http://hdl.handle.net/10397/21111
ISSN: 0378-4266
EISSN: 1872-6372
DOI: 10.1016/j.jbankfin.2009.04.011
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