Bank equity ownership and corporate hedging: Evidence from Japan

Piman Limpaphayom, Daniel A. Rogers, Noriyoshi Yanase

Research output: Contribution to journalArticle

Abstract

This study examines the relation between bank equity ownership and corporate hedging in Japan, an economy where banks are allowed, to a certain limit, to hold shares of firms to which they lend funds. The results show that bank equity ownership is positively related to the corporate usage of derivatives. We also find very little evidence that firm-level financial constraints affect derivatives usage. We further analyze the relation between derivatives usage and firm value to assess whether derivatives usage is driven by bank rent-seeking or speculative behavior. We find that derivatives usage is positively related to firm value providing support to the notion that bank equity ownership increases corporate hedging which, in turn, leads to high firm valuation. Robustness tests show that the relation between hedging and main bank equity ownership is not driven by endogeneity. In the end, our findings suggest that corporate hedging is driven by risk-averse incentives resulting from bank monitoring. We conclude that, in addition to relevant economic factors, ownership structure can also affect corporate hedging behavior.

Original languageEnglish
Pages (from-to)765-783
Number of pages19
JournalJournal of Corporate Finance
Volume58
DOIs
Publication statusPublished - 2019 Oct 1

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Keywords

  • Bank equity ownership
  • Derivatives
  • Firm value
  • Hedging
  • Japan

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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