When Banks Become Pure Creditors : The Effects of Declining Shareholding by Japanese Banks on Bank Lending and Firms’ Risk-Taking

This study empirically examines the impact of an exogenous decrease in banks’ shareholding on bank loans and firms’ risk-taking, utilizing a regulatory change in Japan relating to banks’ shareholding as an instrument. We find that an exogenous reduction in a bank’s shareholding decreased the bank’s share of loans in the client firm’s total loans, while it increased the volatility of a firm’s return on assets. These findings are consistent with the theoretical prediction that banks hold equity claims over client firms to gain a competitive advantage by exploiting complementarity between shareholding and lending activities, and/or to mitigate shareholder–creditor conflict