Daisuke Tsuruta

Bank information monopoly and trade credit: do only banks have information about small businesses?

According to previous studies, a bank can set a higher interest rate for small firms by establishing a lending relationship since information asymmetry limits competition between banks. Therefore, the bank can acquire monopoly rent from small firms. However, if small firms can use trade credit which is another financial source, the bank cannot extract monopoly rent. In this article, we examine whether small firms can use trade credit if the bank sets a higher interest rate. Using panel data of small firms in Japan, our analysis shows that when the interest rate the bank sets is too severe or worsened for the borrower, the ratio of trade payables increases and the bank loses its amount of loans. This result implies that trade creditors alleviate the problems of bank information monopolies in Japan.

Customer relationships and the provision of trade credit during a recession

Having a close relationship with a customer that accounts for a relatively high proportion of sales may be costly for small suppliers and weaken their bargaining power. Suppliers with a weak bargaining position may then find it difficult to reduce their provision of trade credit during a recession despite the need to do so. Employing Japanese small business data, we conclude that close customer relationships are in fact beneficial (not costly) for small suppliers in trade credit contracts. First, we find that small suppliers tend to offer less trade credit during a recession, even if the supplier–customer relationship is close. Second, notwithstanding a close supplier–customer relationship, we find that small suppliers offer less trade credit to their main customers if the supplier is in financial distress or charged higher interest rates by banks.

Nonbank financing and performance of informationally opaque businesses

Previous studies argue that banks offer loans to informationally opaque businesses using relationship lending technology. Using survey data of small businesses in Japan, we show that informationally opaque and financially weak firms that do not have lending relationships use high interest rate nonbank loans because of low availability of bank credit. Furthermore, we show that nonbank loan applicants are likely to incur operating losses and default. These results imply that nonbanks have difficulty avoiding the information problem because borrowers have uninformative financial statements and weak financial conditions.

Do Financial Shocks Have Negative Effects on Small Businesses? New Evidence from Japan for the Late 1990s

Abstract The banking literature suggests that the low performance of the banking sector can spread to real economic activities, especially small businesses. Many previous studies insist that the Japanese experience of the 1990s supports this argument. However, many studies of small businesses are often insufficient since they depend on aggregate data, even though small businesses are likely to face difficult constraints in their activities when financial problems are severe. In this study, we use firm-level data on small businesses and investigate whether bank-dependent small businesses face severe constraints on their activities, which lowers performance. Our results differ from the findings of previous work in this area. First, we show that per the widely used TANKAN statistics, the focus of many existing studies, is misleading and that a majority of respondents in this survey (at least 71%) report no worsening in the lending attitude of financial institutions in the so-called credit crunch period of 1998-1999 (or even in the 2000-2001 period). Second, using detailed firm level panel data from the Credit Risk Database, we find no significant reductions in the loans for the majority of small businesses. Third, while we do find evidence that bank-dependent firms increased reliance on internal funds during the period of the credit crunch (1998-2001), we find no evidence that this negatively impacted firm performance (as reflected in firm growth and profitability measures).

Information asymmetry in small and medium enterprise credit guarantee schemes: evidence from Japan

ABSTRACT In this article, we investigate whether there is adverse selection and/or moral hazard in credit guarantee schemes for small and medium enterprises (SMEs) in Japan. As credit guarantee corporations cannot distinguish low risk from risky borrowers, credit guarantee schemes typically attract a larger proportion of risky borrowers, which results in inefficient resource allocation. Using bank-level data, we analyse whether the default rate is positively associated with the ratio of guaranteed loans to total loans, and find that the data are consistent with an adverse selection and/or moral hazard hypothesis. Further analysis shows that the relationship is stronger for 100% coverage than for 80% coverage, indicating that the ‘20% self-payment’ requirement somewhat mitigates the problem, but not enough to eliminate it altogether.

Variance of Firm Performance and Leverage of Small Businesses

We investigate the relationship between leverage and firm performance using small business data from Japan by estimating the effects of leverage on both average firm performance and the variance of firm performance. We find that leverage has a negative effect on average firm performance and a positive effect on the variance of firm performance. This suggests that the problem of moral hazard is severe for highly leveraged firms. However, when highly leveraged firms have sufficient collateral assets, the effects of leverage are positive for average performance, but negative for the variance of performance. This implies that when small firms have sufficient collateral assets, highly leveraged businesses are better performers.

Natural or unnatural selection? The end of lending relationships for small businesses

ABSTRACT We investigate the situation where small business borrowers and banks end their lending relationships. If credit allocation is efficient, banks terminate their relationships with risky borrowers. Alternatively, small business borrowers are more likely to end their relationships when they have poor investment opportunities and do not require borrowed funds. However, if the soft budget constraints of banks or credit crunches are a significant problem, banks are likely to continue their relationships with risky firms or end their relationships with nonrisky firms, which is representative of an unnatural credit allocation. Using Japanese firm-level data, we show empirically that these relationships end naturally, with natural credit allocation supported even during the recent global financial crisis.