Effects of Regional Bank Merger on Small Business Borrowing: Evidence from Japan

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1 Inernaonal Journal of Economcs and Fnance; Vol. 7, No. 11; 015 ISSN X E-ISSN Publshed by Canadan Cener of Scence and Educaon Effecs of Regonal Bank Merger on Small Busness Borrowng: Evdence from Japan Hronobu Myazak 1 & Hroyuk Aman 1 School of Economcs, Nanzan Unversy, Nagoya, Japan School of Busness Admnsraon, Kwanse Gakun Unversy, Nshnomya, Japan Correspondence: Hronobu Myazak, School of Economcs, Nanzan Unversy, 18 Yamazao-cho, Showa-ku, Nagoya, Ach, , Japan. Tel: E-mal: myahro@nanzan-u.ac.jp Receved: Augus 11, 015 Acceped: Augus 8, 015 Onlne Publshed: Ocober 5, 015 do: /jef.v7n11p6 URL: hp://dx.do.org/ /jef.v7n11p6 Absrac Ths sudy examnes he mpac of a regonal bank merger n Japan on borrowng by small busnesses, focusng on frms ha borrow from he acqurng bank, he acqured bank, or boh. Frs, we fnd ha pos-merger borrowng coss declned. Ths resul suggess ha small borrowers enjoy more favorable pos-merger fnancng condons because effcences from economes of scale lead o lower coss. Second, we fnd ha pos-merger borrowng coss declne for frms ha borrow only from he acqurng or acqured bank, whereas hey dd no declne for frms ha borrow from boh. Thrd, we fnd ha only small busness loans o frms ha borrow from boh he acqurng and acqured banks decrease pos-merger. Ths resul suggess ha small busness lendng mgh declne because of a merged bank s loan porfolo and lendng sraegy. Keywords: bank M&A, regonal bankng, borrowng coss, small busness enerprses, Japan 1. Inroducon Snce hs 01 re-elecon, Prme Mnser Shnzo Abe has sough o revve Japan s sluggsh economy hrough aggressve moneary easng by he Bank of Japan, massve fscal smulus, and srucural reforms. To srengh local economes, Abe s cabne and he Fnancal Servces Agency promoe consoldaons among local banks n a regonal bankng model resemblng ha of Europe and Norh Amerca. Tweny years of mergers have consoldaed Japan s cy banks no hree mega-banks, bu he number of regonal banks remans hgh despe mergers and acqusons (M&A), causng over bankng n some areas. The number of bankrupces among small busness enerprses (SBEs) has rsen snce March 013 followng he expraon of he Small and Medum-Szed Enerprses Fnancng Faclaon Ac. The number of nonperformng loans held by regonal banks also has rsen, he compeon rae among lenders nensfes, and Japan s greyng populaon and declnng brh rae complcae aracng borrowers. Consequenly, Japan s regonal banks face challengng condons as Abe s governmen promoes her consoldaon, and furher wdespread reorganzaon of regonal banks s expeced. European and Amercan regonal banks have consoldaed seadly snce 1990, and researchers have wdely examned he effecs. Sapenza (00) reached hree conclusons regardng he effecs of Ialan bank mergers on busness borrowers. Frs, f mergers occurred beween banks operang n he same provnce (n-marke mergers), pos-merger borrowers from he consoldaed bank pad sgnfcanly lower neres raes. Second, borrowers wh mulple bankng relaonshps had access o broader exernal sources of fnance and were unaffeced by merger acvy. Thrd, newly merged banks reduced lendng o SBEs. Usng propreary daa for US commercal banks, Erel (011) found sgnfcan reducons n spreads for small loans followng mergers. Ths mples ha small borrowers pay lower neres raes afer banks expanded hrough mergers. Unlke Sapenza (00), Erel (011) found ha acqurng banks ncrease lendng o SBEs afer M&A. Exensve research nvesgaes M&A among European and Norh Amercan regonal banks, bu no scholarly consensus has formed abou s effecs on busness lendng. Some sudes hghlghed s posve effecs (Peek & Rosengren, 1998; Focarell & Panea, 003; Avery & Samolyk, 004; Panea, Schvard, & Shum, 009). Oher sudes accenuaed s negave effecs (Berger, Saunders, Scalse, & Udell, 1998; Prager & Hannan, 1998; Bonaccors d Pa & Gobb, 001, 007; Sco & Dunkelberg, 003; Calomrs & Pornrojnangkool, 005; 6

2 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 Garmase & Moskowz, 006; Crag & Dnger, 009; Degryse, Masschelen, & Mchell, 010). Scan research has nvesgaed M&A among Japanese banks. Shn, Fraser, and Kolar (003) examned he 1999 Mzuho merger beween he Indusral Bank of Japan, Da-ch Kangyo Bank, and Fuj Bank o nvesgae wheher consoldaon affeced bank frm relaonshps. Ther even sudy mehodology revealed ha sock prces of all frms ha had borrowed from he acqurng banks declned followng he merger. However, declnes were sgnfcanly less among frms ha used one of he hree as her man bank or had large cred exposure wh one. Uchno and Uesug (01) suggesed ha Japan s larges bank merger Bank of Tokyo-Msubsh and UFJ Bank n 005 engendered hgher borrowng coss parly hrough exogenous reducon n he number of frm bank relaonshps and parly from changes n he acqured bank s organzaonal srucure, ncludng consoldaon of branch neworks. Ogura and Uchda (013) found ha small bank mergers mpar bankers acquson of sof nformaon abou borrowers (Noe 1). Ths suggess ha mergers complcae manageral srucures and hnder acquson and manenance of sof nformaon among small banks. To our knowledge, only he aforemenoned hree sudes examne he mpac of Japanese bank M&A on SBE borrowers. Our sudy dffers from hese sudes n wo respecs. Frs, Shn e al. (003) and Uchno and Uesug (01) analyzed how megabank mergers affec comparavely larger and well-esablshed corporae borrowers. These borrowers lkely are less dependen on ndrec fnancng, whereas small unlsed frms.e., mos regonal busnesses lack easy access o capal markes and lkely depend on bank borrowng. We employ a unque daase of small, unlsed frms o more accuraely observe he effecs of a landmark regonal bank consoldaon. Our sudy offers he leraure s frs emprcal nsghs no he effecs of regonal bank consoldaon n Japan. Second, Ogura and Uchda (013) surveyed SME characerscs only once and only for 005. Our analyss exends o perods followng he merger, usng me-seres fnancal daa. By consderng dfferences beween pre- and pos-merger parameers, we drecly measure s long-run effec. Global sudes on bankng consoldaon employ frm bank mached panel daa o analyze neres raes ha consoldang banks charge corporae borrowers for cred lnes. We could no employ such a daase due o he paucy of neres rae daa n Japan, a dffculy ha may explan why few sudes nvesgae he mpac of Japanese bank M&A on borrowers. We could no solae neres raes on ndvdual loans from dfferen borrowers, ncludng he pos-merger consoldaed bank, and frms can borrow from non-merged banks n her marke, makng dffcul o gauge he effecs of mergers on borrowers. Therefore, we sampled frms ha borrowed only from he acqurng bank, he acqured bank, and boh. We nvesgae he mpac of he merger more precsely usng hs se of frms. In hs respec, our sudy conrbues o he leraure of bank M&A. Ths sudy s srucured as follows. Secon dscusses he heorecal background. Secon 3 presens he daase, model, and resuls of cross-seconal analyss. Secon 4 summarzes and concludes he sudy.. Theorecal Background Theorecal leraure poss ha bank M&A exers posve and negave effecs on corporae borrowers hrough loan raes and quany of lendng. Therefore, we nvesgae he posve effecs of lower borrowng coss hrough effcency gans from economes of scale and scope and he negave effecs when banks exercse marke power o charge corporae borrowers hgher raes. M&A also mgh engender hgher borrowng coss f merged banks persuade governmen o manan her domnan marke posons. Moreover, newly merged banks mgh be excessvely large and complex, generang hgher coss hrough losses of effcency and sof nformaon. Hypohess 1: Effcency gans afer a merger mgh produce favorable fnancng condons for SBEs. Alernavely, lendng condons mgh worsen f mergers rase banks coss or cred marke concenraon. We nvesgaed he relaonshp beween borrowng coss and he number of banks from whch each SBE n our daase borrowed. Damond (1984) showed ha borrowng from a sngle bank s advanageous because enals lower monorng coss. These fndngs sugges ha borrowng from a sngle bank mgh reduce monorng coss and herefore borrowng coss. Alernavely, Peerson and Rajan (1994) showed ha frms borrowng from mulple banks pay sgnfcanly hgher raes n he US. Ths fndng mgh ndcae ha he number of banks from whch frms borrow s a proxy for her credworhness. Ths mples ha banks mgh no lend addonal funds o low-qualy frms, forcng hem o borrow elsewhere a hgher raes. In sum, borrowng coss rse as he number of a frm s lenders ncreases. Conrary o Peerson and Rajan (1994), however, Harhoff and Körng (1998) dd no draw ha concluson for German cred markes. We formulae Hypohess o examne he foregong ssues n he Japanese regonal cred markes: Hypohess : Pre-merger frms ha borrow from boh he acqurng and acqured banks pay hgher borrowng 63

3 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 coss han frms ha borrow only from he acqurng or he acqured bank. Moreover, as mergers poenally reduce he number of banks from whch frms can borrow, borrowng coss mgh declne for frms ha borrow from boh banks. Thrd, we nvesgae wheher M&A affecs quany of lendng. Ths ssue relaes o he sze and composon of banks loan porfolos, her lendng sraeges, and oher facors. Peek and Rosengren (1998) showed ha mergers may promoe small busness lendng f he acqurng bank s small or s porfolo has a larger share of small busness loans han he acqured bank. Erel (011) suggesed ha pos-merger ncreases n numbers of SBE loans mgh resul from changes n lendng echnologes, acqurng banks dversfcaon sraeges, and echnologcal mprovemens (e.g., cred scorng models). Mergers of regonal banks may reduce compeon. Ths, n urn, may reduce SBE lendng n a manner smlar o how compeon may promp SBE lendng because compeon has he endency o nfluence banks o seek more prof opporunes. Berger e al. (1998) decomposed he effecs of bankng consoldaon on shares of SBE lendng no one sac and hree dynamc effecs ha cural SBE lendng. We formulae Hypohess 3 o examne conflcng fndngs n he leraure: Table 1. Ls of varables and her defnons Varable Defnon Dependen varables LOG(r) Logarhm of borrowng cos (%) (neres and dscoun expenses dvded by he sum of long-erm loans, shor-erm loans, and noes dscouned durng he prevous year) (LOANS)/ASSETS Loans (shor-erm and long-erm loans) dvded by angble asses Frms' varables LOG(SALES) Logarhm of sales (housands of yen) PROFITS/SALES Ordnary ncome dvded by sales DEBTRATIO Deb dvded by oal asses LOANSRATIO Long-erm loan rao (long-erm loans dvded by he sum of shor-erm and long-erm loans) (LOANS)/LOANS_TWO Loans (shor-erm and long-erm loans) dvded by he sum of loans of boh Shnwa Bank and Kyusyu Bank LOG(AGE) Logarhm of frm's age BOTH 1 f he frm ransaced from boh Shnwa Bank and Kyusyu Bank, 0 oherwse. VALUEA 1 f cred rang of he frm s A, 0 oherwse. VALUEC 1 f cred rang of he frm s C, 0 oherwse. Banks' and regonal varables LOG(RATE) Logarhm of loan raes of Shnwa Bank and Kyushyu Bank LOANS_TWO/GDP The sum of loans of boh Shnwa Bank and Kyusyu Bank dvded by prefecural GDP LOANS_TOTAL/GDP The sum of prefecural loans dvded by prefecural GDP Mergers' varables AFTERM&A 1 f he year afer M&A ( ), 0 oherwse. Table. Descrpve sascs of varables Varable Mean Medan Maxmum Mnmum Sd. Dev. Obs. Dependen varables LOG(r) (LOANS)/ASSETS Frms' varables LOG(SALES) PROFITS/SALES DEBTRATIO LOANSRATIO (LOANS)/LOANS_TWO LOG(AGE) BOTH VALUEA VALUEC

4 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 Banks' and regonal varables LOG(RATE) LOANS_TWO/GDP LOANS_TOTAL/GDP Mergers' varables AFTERM&A Hypohess 3: SBE lendng rses afer mergers. If acqurng banks are small or her porfolos hold a greaer proporon of SBE loans han acqured banks, loans o frms ha borrow from boh he acqurng and acqured banks ncrease pos-merger. The nex secon uses he frm-level daase o examne hese hree hypoheses. The ls of varables and her defnons are ndcaed n Table Emprcal Analyss 3.1 Mehodology We focus on he Kyushu regon, where a spae of regonal bank consoldaons has occurred. In addon, we parcularly examne Japan s landmark regonal bank merger: Shnwa Bank and Kyushu Bank n 003. We selec daa from Tokyo Shoko Research, Ld (TSR) for 150 busness borrowers from Tosho Shnyo-Roku (he Kyushu regon) ha ransaced wh eher or boh banks durng Isolang hese 150 frms enabled us o analyze he Shnwa Kyushu merger clearly. Ths s a unque aspec of our sudy. Our daa are obaned from he TSR-Van daabase ha daly updaes nformaon for 1.9 mllon Japanese corporaons, ncludng busness profles, fnancal daa, bankrupcy nformaon, and markeng repors. We examned unlsed regonal frms. Table repors descrpve sascs for varables. The upper row (lower row) of Table 3 shows pre-merger daa (pos-merger daa). The mean value of log( r ) declnes from pre-merger o pos-merger. The mean value of LOANS / ASSETS declnes from 3.36 pre-merger o pos-merger. Emprcal analyss deermned wheher he merger affeced borrowng coss and quany of lendng. We dvded he perod no pre-merger ( ) and pos-merger ( ) subsamples. The pos-merger perod may seem bref, bu bank managers, consulans, researchers, and fnancal meda regard hree years as suffcen for a full ranson o a pos-merger equlbrum (Berger e al., 1998) (Noe ). The aud perod for he analyzed frms vares, makng mpossble o specfy exac yearly daa. Therefore, we use pooled ordnary leas squares whou consderng year effecs. Table 3. Descrpve sascs of subsample varables Before Merger Varable Mean Medan Maxmum Mnmum Sd. Dev. Obs. Dependen varables LOG(r) (LOANS)/ASSETS Frms' varables LOG(SALES) PROFITS/SALES DEBTRATIO LOANSRATIO (LOANS)/LOANS_TWO LOG(AGE) BOTH VALUEA VALUEC Banks' and regonal varables LOG(RATE) LOANS_TWO/GDP LOANS_TOTAL/GDP

5 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 Afer Merger Varable Mean Medan Maxmum Mnmum Sd. Dev. Obs. Dependen varables LOG(r) (LOANS)/ASSETS Frms' varables LOG(SALES) PROFITS/SALES DEBTRATIO LOANSRATIO (LOANS)/LOANS_TWO LOG(AGE) BOTH VALUEA VALUEC Banks' and regonal varables LOG(RATE) LOANS_TWO/GDP LOANS_TOTAL/GDP Frs, we esmae he followng regresson equaon for frm a me : log( r ) ( PROFITS / SALES ) ( DEBTRATIO ) ( LOANS 3 AFTERM & A VALUEA VALUEC u / LOANS _ TWO ) log( RATE ) ( LOANSRATIO ) log( AGE ) 5 6 (1) Dependen varable log( r ) s he logarhm of borrowng cos for frm a me and s calculaed usng neres and dscoun expenses dvded by he sum of long-erm loans, shor-erm loans, and noes dscouned durng he prevous year. Whn he framework of Equaon (1), Hypohess 1 yelds esable predcons for all coeffcens. The man ndependen varable ( AFTERM & A ) equals 1 for and 0 oherwse. Hypohess 1 ha pos-merger fnancng mgh favor small borrowers due o effcency gans mples a negave sgn for. The co-hypohess 7 ha condons worsen f mergers engender hgher coss or cred marke concenraon mples a posve sgn for. 7 To conrol for varaons n borrowng coss, we nclude demand-sde, supply-sde, neres rae-specfc, merger-relaed, and frm-specfc varables. PROFITS / SALES and DEBTRATIO are demand-sde varables. PROFITS / SALES, an ndcaor of a soundly managed and performng frm, s ordnary ncome dvded by sales. The hgher s value, he lower s he neres rae charged by he bank, mplyng a negave sgn for. 1 DEBTRATIO, a proxy for a frm s fundamenal rsk characerscs, s calculaed as deb dvded by oal asses. A hgher value ndcaes a rsker frm and a hgher neres rae for lendng. We expec he sgn of o be posve. Supply-sde varable LOANS / LOANS _ TWO s calculaed as (shor-erm and long-erm) loans dvded by he sum of loans from boh Shnwa (he acqurng bank) and Kyusyu (he acqured bank). As loans from he banks ncrease, raes declne. We expec he sgn of 3 o be negave. Three neres rae-specfc varables conrol for economy-wde varaons n underlyng cos of capal. Among he hree, log( RATE ) s he core varable, represenng he logarhm of loan raes for Shnwa and Kyusyu. Borrowng coss are lnked o log( RATE ), suggesng ha has a posve sgn. 4 LOANSRATIO s he rao of long-erm loans calculaed as long-erm loans dvded by he sum of shor-erm and long-erm loans. Borrowng 66

6 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 coss rse as ncreases, mplyng a posve sgn for. The logarhm of a frm s age, log( AGE ) s calculaed as he number of years snce a frm was esablshed. Young frms generally pay hgher raes han esablshed frms. However, lenders mgh offer younger frms a lower rae o encourage long-erm relaonshps and fuure borrowng. In such a case, younger frms mgh pay lower raes han esablshed frms. A negave value for ndcaes an nverse relaon beween age and neres 6 rae; a posve value suggess he oppose. The regresson ncludes credworhness dummes VALUEA and VALUEC. The Tosho Shnyo-Roku repor raes frms A, B, and C, wh A beng he hghes rang and C beng he lowes. VALUEA and VALUEC equal 1 f a frm s cred s A-raed or C-raed and 0 oherwse. Second, we examned Hypohess by esmang he effec of a reducon n he number of banks from whch SBEs borrow. Our esmaed model has hese specfcaons: log( r ) ( PROFITS / SALES ) ( DEBTRATIO ) log( AGE ) AFTERM & A BOTH VALUEA VALUEC u ( LOANS / LOANS _ TWO ) log( RATE ) ( LOANSRATIO ) ( BOTH * AFTERM & A ) Alongsde ndependen varables n Equaon (1), we nclude BOTH and he neracon varable BOTH * AFTERM &. BOTH equals 1 f he SBE had ransaced wh boh Shnwa and Kyusyu and 0 A oherwse. A posve value for β 8 suppors Hypohess ha frms borrowng from he acqurng and acqured banks pay hgher coss han frms ha borrow from one or he oher. A negave value for β 9 suggess ha pos-merger coss for SBEs ha borrowed from boh Shnwa and Kyusyu declned. To examne Hypohess 3, we esmae he effec of mergers on quany of lendng. Our basc esmaed model has hese specfcaons: Dependen varable LOANS / ASSETS log( SALES ) ( PROFITS / SALES ) log( r ) DEBTRATIO X AFTERM & A BOTH 4 BOTH * AFTERM & A VALUEA VALUEC u LOANS / ASSETS s calculaed as loans (shor-erm and long-erm loans) dvded by asses. The man ndependen varables are AFTERM & A and BOTH, whch are he same as n Equaons (1) and (). Accordng o Hypohess 3, a posve coeffcen for mples ha pos-merger lendng ncreases. A posve 6 value for suggess ha loans o frms borrowng from boh Shnwa and Kyusyu ncreased pos-merger. 8 The logarhm of sales ( log( SALES ) ) s a proxy for frm sze. As ncreases, lendng o he frm generally ncreases. Therefore, he expeced sgn of s posve. Ths regresson ncludes () (3) PROFITS / SALES, log( r ), DEBTRATIO, VALUEA, and VALUEC employed n Equaons (1) and (). The hgher he value of 5 PROFIT / SALE, he more lkely banks are o lend he frm money, mplyng a posve sgn for. As he borrowng cos for frm a me, he expeced sgn for s negave. r s We expec DEBTRATIO o negavely correlae wh LOANS / SALES n Equaon (3). However, afer Japan s bubble economy burs, some banks len o deeply ndebed frms, parcularly n real esae and consrucon, a pracce known as forbearance lendng. Alhough he erm has no sngle defnon, Sekne, Kobayash, and Saa (003) defne as refnancng a loan (or provdng addonal cred) even hough he borrower lkely canno repay he orgnal amoun. Many heorecal models examne moves for forbearance lendng, bu we beleve banks smply hope o preven he borrower s bankrupcy. If he bank engages n 3 67

7 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 forbearance lendng, DEBTRATIO posvely correlaes wh LOANS / SALES n Equaon (3). Consderng he posve and negave effecs of DEBTRATIO o LOANS / SALES, we conrol for nonlneares of DEBTRATIO n he lendng relaonshp. Therefore, we esmae Equaon (4) as LOANS DEBTRATIO 4 BOTH 9 / ASSETS We also ncluded a vecor of log( SALES ) ( PROFITS * AFTERM & A VALUEA VALUEC u DEBTRATIO X AFTERM & A BOTH / SALES ) log( r ) X o conrol for prefecural economc condons. Ths vecor comprses he sum of loans by boh Shnwa and Kyusyu dvded by prefecural GDP and he sum of prefecural loans dvded by prefecural GDP. We expec o be posve Emprcal Resuls Resuls n Table 4 summarze he esmaed coeffcens for Equaon (1) n our models (Noe 3). Columns I and II dffer n ha column I ncludes only PROFITS / SALES as a demand-sde varable, whereas column II ncludes only DEBTRATIO as a demand-sde varable. Column III ncludes boh. These hree regressons nclude only log( RATE ) as an neres rae-specfc varable. In addon, columns IV and V nclude PROFITS / SALES and DEBTRATIO as demand-sde varables. They dffer n ha column IV ncludes log( RATE ) and LOANSRATIO as neres rae-specfc varables, whereas column V ncludes log( RATE ) and log( AGE ) as neres rae-specfc varables. Column VI s our preferred specfcaon because ncludes all varables. Esmaed coeffcens of AFTERM & A are negave and sascally sgnfcan n all models. These fndngs endorse hose of Sapenza (00) and Erel (011), suggesng pos-merger borrowng coss declned because effcency gans creae favorable fnancng condons for SBEs as per Hypohess 1. Esmaed coeffcens of supply-sde varables n all models, ndcang raes declned as borrowng ncreased. 8 LOANS / LOANS _ TWO are negave and sascally sgnfcan In columns V and VI, esmaed coeffcens of log( AGE ) are posve and sgnfcan, mplyng ha older SBEs pad hgher raes o banks. Ths fndng conravenes our expecaons bu endorses hose of Peerson and Rajan (1995), who surmse ha rural banks seek connung relaonshps from small busnesses and accep lower reurns on nal loans. We denfy he effec of rae smoohng on long-erm relaonshps. Fndngs may be specfc o regonal markes, whch have fewer banks and herefore greaer barganng power ha srenghens as borrowers are locked no relaonshps. Thus, survvng older frms mus pay hgher raes f hey canno borrow elsewhere. Ths would explan he posve coeffcens of log( AGE ) (Noe 4). In columns IV and VI, esmaed coeffcens of 3 (4) are posve and sascally sgnfcan n all models. Ths fndng mples ha SBEs borrowng coss rose as long-erm loan raos ncreased, a fndng conss wh he heory. Esmaed coeffcens of log( RATE ) are no sascally sgnfcan n any model excep n column IV. Esmaed coeffcens of VALUEA and VALUEC are negave and sascally sgnfcan n all models. These fndngs mply lower borrowng coss for A-raed and C-raed han for B-raed frms. Esmaed coeffcens of demand-sde varables PROFITS and are no sascally / SALES DEBTRATIO sgnfcan n any model. LOANSRATIO 68

8 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 Table 4. Resuls for Equaon (1) Varable Ⅰ Ⅱ Ⅲ Consan 5.48 ** ** 5.60 ** (.47) (.46) (.47) PROFITS/SALES (0.01) (0.01) DEBTRATIO (0.3) (0.3) (LOANS)/LOANS_TWO *** *** *** (47.54) (48.3) (48.8) LOG(RATE) (1.70) (1.70) (1.71) LOANSRATIO LOG(AGE) AFTERM&A ** ** ** (0.1) (0.1) (0.1) VALUEA ** -0.4 ** ** (0.18) (0.19) (0.19) VALUEC ** ** ** (0.16) (0.16) (0.17) Adj. R No. of observaons Varable Ⅳ Ⅴ Ⅵ Consan 5.14 ** * 4.01 * (.45) (.45) (.43) PROFITS/SALES (0.01) (0.01) (0.01) DEBTRATIO (0.3) (0.3) (0.3) (LOANS)/LOANS_TWO ** ** ** (48.80) (47.68) (48.16) LOG(RATE) -.84 * (1.70) (1.68) (1.67) LOANSRATIO ** 0.40 ** (0.19) (0.18) LOG(AGE) 0.73 *** 0.74 *** (0.09) (0.09) AFTERM&A *** ** ** (0.1) (0.1) (0.1) VALUEA ** ** ** (0.19) (0.19) (0.19) VALUEC ** ** ** (0.17) (0.16) (0.16) Adj. R No. of observaons Noes. Sandard errors are n parenheses. *** Sgnfcan a 1% level, ** sgnfcan a 5% level, * sgnfcan a 10% level. Table 5 summarzes esmaed coeffcens for Equaon () n our models (Noe 5). Columns I and II dffer n ha Columns I ncludes only PROFITS / SALES as a demand-sde varable, whereas column II ncludes only DEBTRATIO as a demand-sde varable. Column III ncludes boh. These hree regressons nclude only log( RATE ) as an neres rae-specfc varable. Columns IV and V nclude boh PROFITS / SALES and DEBTRATIO as demand-sde varables. They dffer n ha column IV ncludes boh log( RATE ) and LOANSRATIO as neres rae-specfc varables, whereas column V ncludes log( RATE ) and log( AGE ). Column VI s as our preferred specfcaon because ncludes all varables. 69

9 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 We ran regressons addng BOTH and he neracon varable BOTH * AFTERM & A (Table 5). Esmaed coeffcens of BOTH are posve and sascally sgnfcan n all models. These resuls suppor Hypohess ha frms whch borrow from wo banks pay hgher raes han frms borrowng from one because concenraed borrowng reduces monorng and borrowng coss. Alernavely, he number of lenders mgh be a proxy for frm qualy. If so, our fndngs for Japan echo hose of Peerson and Rajan (1994) for he US. Esmaed coeffcens of BOTH * AFTERM & A are no sascally sgnfcan n any model. These resuls conravene Hypohess and sugges ha pos-merger borrowng coss of frms ha borrow from boh Shnwa and Kyusyu dd no declne. Esmaed coeffcens of AFTERM & A are negave and sascally sgnfcan n all models. These resuls also sugges ha borrowng coss of frms ha borrow only from one or he oher declned. Esmaed coeffcens of oher varables ( PROFITS / SALES, DEBTRATIO, LOAN / LOAN _ TWO, log( RATE ), LOANSRATIO, log( AGE ), VALUEA, and VALUEC ) are nearly he same as n Table 4. Table 6 summarzes esmaed coeffcens for Equaons (3) and (4) n our models (Noe 6). Columns I IV show regresson resuls for Equaon (3). Columns V VIII show regresson resuls for Equaon (4). To conrol for prefecural economc condons, column I ncludes he sum of loans from boh Shnwa and Kyusyu dvded by prefecural GDP, LOANS _ TWO / GDP, whereas column II ncludes he sum of prefecural loans dvded by prefecural GDP, _ TOTAL GDP. In addon o columns I and II, we ran regressons addng BOTH LOANS / and he neracon varable BOTH * AFTERM & A n columns III and IV. Esmaed coeffcens of AFTERM & A are no sascally sgnfcan n any model. These resuls conravene Hypohess 3 ha small busness loans ncrease pos-merger. Esmaed coeffcens of BOTH are posve and sascally sgnfcan n columns III and IV. These resuls ndcae greaer lendng o frms ha borrowed from boh Shnwa and Kyusyu han hose ha borrowed from one or he oher. However, esmaed coeffcens of BOTH * AFTERM & are negave and sascally sgnfcan n columns III and IV. These resuls sugges ha A pos-merger loans o SBEs borrowng from boh Shnwa and Kyusyu decreased. Our fndngs for hose frms endorse fndngs of Sapenza (00) and Berger e al. (1998) bu conradc hose of Erel (011) and Peek and Rosengren (1998). One nerpreaon of our resuls s ha banks porfolos and lendng sraeges call for less SBE lendng. Table 5. Resuls for Equaon () Varable Ⅰ Ⅱ Ⅲ Consan ** ** ** (.4) (.4) (.4) PROFITS/SALES (0.01) (0.01) DEBTRATIO (0.) (0.3) (LOANS)/LOANS_TWO *** *** *** (47.7) (47.8) (47.85) LOG(RATE) (1.68) (1.67) (1.68) LOANSRATIO LOG(AGE) AFTERM&A ** ** ** (0.) (0.) (0.) BOTH ** ** ** (0.7) (0.7) (0.7) BOTH*AFTERM&A (0.3) (0.3) (0.3) 70

10 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 VALUEA ** ** ** (0.18) (0.19) (0.19) VALUEC ** * -0.9 * (0.16) (0.16) (0.16) Adj. R No. of observaons Varable Ⅳ Ⅴ Ⅵ Consan ** (.41) (.39) (.38) PROFITS/SALES (0.01) (0.01) (0.01) DEBTRATIO (0.3) (0.) (0.3) (LOANS)/LOANS_TWO *** *** ** (48.66) (46.9) (47.69) LOG(RATE) (1.67) (1.64) (1.63) LOANSRATIO * * (0.18) (0.18) LOG(AGE) *** *** (0.09) (0.08) AFTERM&A ** ** ** (0.) (0.1) (0.1) BOTH * *** ** (0.7) (0.6) (0.6) BOTH*AFTERM&A (0.3) (0.3) (0.3) VALUEA ** *** *** (0.19) (0.18) (0.18) VALUEC ** * ** (0.16) (0.16) (0.16) Adj. R No. of observaons Noes. Sandard errors are n parenheses. *** Sgnfcan a 1% level, ** sgnfcan a 5% level, * sgnfcan a 10% level. Columns V VIII of Table 6 nclude DEBTRATIO o capure forbearance lendng. As n column I, we nclude LOANS _ TWO / GDP n column V, whereas, column VI ncludes LOANS _ TOTAL / GDP. In addon, we ran regressons addng BOTH and BOTH * AFTERM & A n columns VII and VIII. Esmaed coeffcens of AFTERM & A are no sascally sgnfcan n any model. Esmaed coeffcens of BOTH are posve and sascally sgnfcan n columns VII and VIII, bu for BOTH * AFTERM & A hey are negave and sascally sgnfcan n columns VII and VIII. Resuls n columns V VIII concde wh hose n columns I IV. Esmaed coeffcens of log( r ) are negave and sascally sgnfcan n columns I VIII, whch s conssen wh he heory. Esmaed coeffcens of DEBTRATIO are no sascally sgnfcan n Columns V VIII, bu hey are posve and sascally sgnfcan for merged Shnwa and Kyusyu bank engaged n forbearance lendng. DEBTRATIO n columns I IV. These resuls sugges ha he In Columns I VIII, esmaed coeffcens of oher varables ( log( SALES ), PROFITS / SALES, DEBTRATIO, LOANS / LOANS _ TWO, LOANS _ TOTAL / GDP, and VALUEA ) are no sascally sgnfcan. Esmaed coeffcens of VALUEC are posve and sascally sgnfcan only n columns III, IV, and VIII. 71

11 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 Table 6. Resuls for Equaons (3) and (4) Varable Ⅰ Ⅱ Ⅲ Ⅳ Consan ** ** (6.95) (11.4) (6.80) (11.00) LOG(SALES) (0.30) (0.30) (0.9) (0.9) PROFITS/SALES (0.07) (0.07) (0.07) (0.07) LOG(r) *** *** *** *** (0.48) (0.48) (0.47) (0.47) LOANS_TWO/GDP (0.7) (19.86) LOANS_TOTAL/GDP (16.37) (16.03) DEBTRATIO DEBTRATIO ** ** * * (1.76) (1.76) (1.7) (1.7) AFTERM&A (1.34) (1.74) (1.4) (1.78) BOTH 7.98 *** 7.98 *** (.04) (.04) BOTH*AFTERM&A * * (.46) (.46) VALUEA (1.46) (1.46) (1.43) (1.43) VALUEC **.564 ** (1.8) (1.8) (1.5) (1.5) Adj. R No. of observaons Varable Ⅴ Ⅵ Ⅶ Ⅷ Consan ** ** (7.13) (11.31) (7.00) (11.08) LOG(SALES) (0.30) (0.30) (0.9) (0.9) PROFITS/SALES (0.07) (0.07) (0.07) (0.07) LOG(r) -.69 *** *** *** *** (0.48) (0.48) (0.48) (0.48) LOANS_TWO/GDP (0.3) (19.91) LOANS_TOTAL/GDP (16.44) (16.09) DEBTRATIO (.56) (.56) (.50) (.50) DEBTRATIO (5.15) (5.15) (5.05) (5.06) AFTERM&A (1.35) (1.75) (1.43) (1.79) BOTH 7.95 *** 7.95 *** (.04) (.05) BOTH*AFTERM&A * * (.47) (.47) VALUEA (1.5) (1.5) (1.49) (1.49) VALUEC ** (1.8) (1.8) (.47) (1.5) Adj. R No. of observaons Noes. Sandard errors are n parenheses. *** Sgnfcan a 1% level, ** sgnfcan a 5% level, * sgnfcan a 10% level. 7

12 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; Concluson Ths emprcal sudy examned Japan s merger of wo regonal banks Shnwa Bank and Kyushu Bank n 003. Usng daa for 150 small busnesses ha had borrowed only from Shnwa (he acqurng bank), only from Kyusyu (he acqured bank), or from boh banks, we examned hree hypoheses ha bear mplcaons for fuure regonal bankng consoldaons n Japan. The sudy documened hree fndngs. Frs, we found ha SBEs borrowng coss decreased afer he Shnwa Kyusyu merger. Lookng ahead oward fuure bank consoldaons, hs resul suggess ha small busness borrowers enjoy more favorable fnancng condons pos-merger because economes of scale reduce coss hrough effcency gans. Second, SBEs ha borrowed from boh Shnwa and Kyusyu (pre-merger) pad hgher coss han frms ha had borrowed from one or he oher. Ths suggess ha concenraed borrowng mgh reduce monorng and borrowng coss followng fuure consoldaons. Alernavely, he number of lenders mgh be a proxy for he borrower s qualy. Borrowng coss of frms ha borrow only from one or he oher declned (pos-merger); however, borrowng coss of frms ha borrow from boh dd no declne. Thrd, we found greaer lendng o SBEs ha borrowed from boh Shnwa and Kyusyu han SBEs ha borrowed from one or he oher. Furhermore, we found ha loans o SBEs from boh Shnwa and Kyusyu decreased pos-merger. Gven ha observers ancpae connued consoldaons among Japan s regonal banks, hs resul suggess ha fuure lendng o SBEs mgh declne because of a merged bank s loan porfolo and lendng sraegy. Thus, hs sudy has hghlghed he effecs of a landmark regonal bank consoldaon n Japan and dscussed he mpac on SBE borrowers n he Kyushu regon. Despe he sudy s emprcal relably, furher scholarshp s warraned before generalzng s resuls. Noneheless, has denfed consderaons relevan o busness, bankng, research, and polcymakers as fuure regonal bank consoldaons unfold. Acknowledgemens The auhors are graeful for fnancal suppor from he Nanzan Unversy Pache Research Subsdy I-A- for 015, I-A-1 for 011, he Zengn Foundaon for Sudes on Economcs and Fnance, and he Japan Socey for he Promoon of Scence hrough Grans-n-Ad for Scenfc Research (KAKENHI ). The auhors benefed from commens by parcpans a he annual meeng of he Japanese Economc Assocaon a Doshsya Unversy, he Regonal Fnance Conference a Nagoya Unversy, he annual meeng of he Japan Fnance Assocaon a Toyo Unversy, and he Moneary Economc Workshop a Kobe Unversy. The auhors would lke o hank Enago ( for he Englsh language revew. The auhors are responsble for all errors. References Avery, R. B., & Samolyk, K. A. (004). Bank consoldaon and small busness lendng: The role of communy banks. Journal of Fnancal Servces Research, 5, hp://dx.do.org/10.103/b:fina c Berger, A. N., & Udell, G. F. (1995). Relaonshp lendng and lnes of cred n small fnance. Journal of Busness, 68, Rereved from hp:// Berger, A. N., Saunders, A., Scalse, J. M., & Udell, G. F. (1998). The effecs of bank mergers and acqusons on small busness lendng. Journal of Fnancal Economcs, 50, hp://dx.do.org/ /s x(98) Bonaccors d Pa, E., & Gobb, G. (001). The effecs of bank consoldaon and marke enry on small busness lendng, Banca d Iala, Tema d dscussone, 404. Rereved from hps:// hmlpage.language=1 Bonaccors d Pa, E., & Gobb, G. (007). Wnners or losers? The effecs of bankng consoldaon on corporae borrowers. Journal of Fnance, 6, hp://dx.do.org/ /j x Boo, A. (000). Relaonshp bankng: Wha do we know? Journal of Fnancal Inermedaon, 9, 7-5. hp://dx.do.org/ /jfn Calomrs, C. W., & Pornrojnangkool, T. (005). Monopoly-creang bank consoldaon? The merger of Flee and Bank Boson. NBER Workng Paper, Rereved from hp:// 73

13 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 Crag, B. R., & Dnger, V. (009). Bank mergers and he dynamcs of depos neres raes. Journal of Fnancal Servces Research, 36, hp://dx.do.org/ /s Degryse, H., & Cayseele, P. V. (000). Relaonshp lendng whn a bank-based sysem: Evdence from European small busness daa. Journal of Fnancal Inermedaon, 9, hp://dx.do.org/ /jfn Degryse, H., & Ongena, S. (005). Dsance, lendng relaonshps and compeon. Journal of Fnance, 601, hp://dx.do.org/ /j x Degryse, H., Km, M., & Ongena, S. (005). Mcroeconomercs of Bankng: Mehods, Applcaons, and Resuls. Oxford Unversy Press. Degryse, H., Masschelen, N., & Mchell, J. (010). Sayng, droppng, or swchng: The mpacs of bank mergers on small frms. The Revew of Fnancal Sudes, 4, hp://dx.do.org/ /rfs/hhp16 Damond, D. W. (1984). Fnancal nermedaon and delegaed monorng. The Revew of Fnancal Sudes, 51, hp://dx.do.org/10.307/97430 Erel, I. (011). The effec of bank mergers on loan prces: Evdence from he Uned Saes. The Revew of Fnancal Sudes, 4, hp://dx.do.org/ /rfs/hhp034 Farnha, L. A., & Sanos, J. A. C. (00). Swchng from sngle o mulple bank lendng relaonshps: Deermnans and mplcaons. Journal of Fnancal Inermedaon, 11, hp://dx.do.org/ /jfn Focarell, D., & Panea, F. (003). Are mergers benefcal o consumers? Evdence from he marke for bank deposs. Amercan Economc Revew, 93, hp://dx.do.org/10.157/ Garmase, M. J., & Moskowz, T. J. (006). Bank mergers and crme: The real and socal effecs of cred marke compeon. Journal of Fnance, 61, hp://dx.do.org/ /j x Harhoff, D., & Körng, T. (1998). Lendng relaonshps n Germany Emprcal evdence from survey daa. Journal of Bankng and Fnance,, hp://dx.do.org/ /s (98) Houson, J., & James, C. (1996). Bank nformaon monopoles and he mx of prvae and publc deb clams. Journal of Fnance, 51, hp://dx.do.org/ /j b059.x Houson, J. F., James, C. M., & Ryngaer, M. D. (001). Where do merger gans come from? Bank mergers from he perspecve of nsders and ousders. Journal of Fnancal Economcs, 60, hp://dx.do.org/ /s x(01) Ogura, Y., & Uchda, H. (014). Bank consoldaon and sof nformaon acquson n small busness lendng. Journal of Fnancal Servces Research, 45, hp://dx.do.org/ /s Panea, F., Schvard, F., & Shum, M. (009). Do mergers mprove nformaon? Evdence from he loan marke. Journal of Money, Cred and Bankng, 41, hp://dx.do.org/ /j x Peek, J., & Rosengren, E. S. (1998). Bank consoldaon and small busness lendng: I s no jus bank sze ha maers. Journal of Bankng and Fnance,, hp://dx.do.org/ /s (98) Peek, J., & Rosengren, E. S. (005). Unnaural selecon: Perverse ncenves and he msallocaon of cred n Japan. Amercan Economc Revew, 95, hp://dx.do.org/10.157/ Peerson, M., & Rajan, R. (1994). The benef of lendng relaonshps: Evdence from small busness daa. Journal of Fnance, 49, hp://dx.do.org/10.307/39133 Peerson, M., & Rajan, R. (1995). The effec of cred marke compeon on lendng relaonshps. Quarerly Journal of Economcs, 110, Rereved from hp:// Prager, R. A., & Hannan, T. H. (1998). Do subsanal horzonal mergers generae sgnfcan prce effecs? Evdence from he bankng ndusry. Journal of Indusral Economcs, 46, hp://dx.do.org/ / Rhoades, S. (1998). The effcency effecs of bank mergers. Journal of Bankng and Fnance,, hp://dx.do.org/ /s (97) Sapenza, P. (00). The effecs of bankng mergers on loan conracs. Journal of Fnance, 57, hp://dx.do.org/ /

14 Inernaonal Journal of Economcs and Fnance Vol. 7, No. 11; 015 Sco, J. A., & Dunkelberg, W. C. (003). Bank mergers and small frm fnancng. Journal of Money, Cred and Bankng, 35, Rereved from hp:// Sekne, T., Kobayash, K., & Saa, Y. (003). Forbearance lendng: The case of Japanese frms. Moneary and Economc Sudes, 1, Rereved from hp:// Shn, G. H., Fraser, D. R., & Kolar, J. W. (003). How does bankng ndusry consoldaon affec bank-frm relaonshps? Evdence from a large Japanese bank merger. Pacfc-Basn Fnance Journal, 11, hp://dx.do.org/ /s x(03) Sen, J. C. (00). Informaon producon and capal allocaon: Decenralzed versus herarchcal frms. Journal of Fnance, 57, hp://dx.do.org/ / Uchno, T., & Uesug, I. (01). The effecs of a megabank merger on frm-bank relaonshps and borrowng coss. RIETI Dscusson Paper Seres, 1-E-0. Rereved from hp:// Noes Noe 1. The defnon of sof nformaon s vague ndcaes nformaon ha canno be drecly verfed by anyone oher han he agen who colleced and s dffcul o communcae even whn an organzaon. Arbues such as an enrepreneur s zeal and compeence and employee morale canno be unambguously documened n a repor ha a loan offcer can show o hs superors. See Sen (00) and Ogura and Uchda (013). Noe. Ths squares wh Rhoades (1998) and Houson, James, and Ryngaer (001). In hese sudes, pos-merger cos savngs and revenue gans ake abou hree years. Noe 3. Noe ha alhough we seleced 150 borrowng frms and a sample perod beween 000 and 007, he number of observaons s 61 because of some mssng daa. Noe 4. Smlar argumens are presened n sudes peranng o he effecs of he duraon of he relaonshp beween he lendng bank and borrower on he loan rae. Degryse and Cayseele (000) and Degryse and Ongena (005) found ha he lendng rae ncreases n andem wh he duraon of he relaonshp. In conras, Berger and Udell (1995) repor ha he duraon of he relaonshp has a negave effec on he lendng rae. Moreover, here are sudes ha presen conflcng fndngs. For a survey of hese fndngs, see Degryse, Km and Ongena (009). Noe 5. Followng Degryse and Cayseele (000), we aemped o address he poenal smulaney problem beween log( r ) and ndependen varables. As shown n Tables 4 and 5, deleng one ndependen varable (for nsance, PROFITS / SALES ) does no affec he esmaes of oher varables. These resuls sugges ha smulaney problems n our esmaed Equaons (1) and () are mnmal. Noe 6. In he same manner as Equaons (1) and (), we aemped o address he poenal smulaney problem beween LOANS / ASSETS and ndependen varables. Deleng log( r ) does no affec he esmaes of oher varables, whch s no repored n hs sudy. From hese resuls, we beleve ha smulaney problems n our esmaed Equaons (3) and (4) are mnmal. Copyrghs Copyrgh for hs arcle s reaned by he auhor(s), wh frs publcaon rghs graned o he journal. Ths s an open-access arcle dsrbued under he erms and condons of he Creave Commons Arbuon lcense (hp://creavecommons.org/lcenses/by/3.0/). 75

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