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The evolving nature of Japanese corporate governance: Guaranteed bonds vs. rated bonds

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Listed:
  • Han, Seung Hun
  • Pagano, Michael S.
  • Shin, Yoon S.
Abstract
We investigate a large set of yen-denominated Japanese corporate bonds composed of bank-guaranteed vs. unguaranteed bonds and find evidence of the demise of main bank relationships and transformation to market-based corporate governance since the 2008 financial crisis. We find that issuers with unrated and bank-guaranteed bonds have more information asymmetry and possess poorer firm quality. Japanese banks provide credit guarantees to the bonds issued by small or opaque firms with weaker financial profiles, thus reducing the risk of issuer default, as well as saving on bond rating fees and the costs of a public offering. The bank guarantee for private and unrated bonds serves as valuable (but costly) protection for investors who invest in these riskier issuers’ bonds. Most importantly, after the U.S. financial crisis, the impact of bank guarantees on yield spreads becomes much less significant as bond issuers have begun to rely more on credit ratings as a potentially cheaper and more effective monitoring/corporate governance mechanism.

Suggested Citation

  • Han, Seung Hun & Pagano, Michael S. & Shin, Yoon S., 2019. "The evolving nature of Japanese corporate governance: Guaranteed bonds vs. rated bonds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 58(C), pages 162-183.
    • Handle: RePEc:eee:intfin:v:58:y:2019:i:c:p:162-183
    DOI: 10.1016/j.intfin.2018.10.001
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    Cited by:

    1. Cheng, Liubing & Chen, Yanyan & Zhang, Yan, 2022. "Business groups and corporate bond costs: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    2. Byoun, Soku & Han, Seung Hun & Shin, Yoon S., 2021. "Does the Nationally Recognized Statistical Rating Organization certification matter for Japanese credit rating agencies?," Journal of Financial Markets, Elsevier, vol. 56(C).
    3. Guo, Hongling & Sun, Yue & Qiu, Xuemei, 2021. "Cross-shareholding network and corporate bond financing cost in China," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    4. Arikawa, Yasuhiro & Byoun, Soku & Han, Seung Hun & Pagano, Michael S. & Shin, Yoon S., 2024. "The role of Japanese corporate governance features in explaining rating differences between global and Japanese rating agencies," Journal of Banking & Finance, Elsevier, vol. 164(C).
    5. Liu, Tianming & Xiong, Haifang & Li, Yifei & Wang, Zhiqiang, 2023. "The flight to safety during credit recovery: The role of implicit government guarantees," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    6. Ignacio J. Miñambres & Jana Vargovčíková, 2021. "Values at the crossroads of politics and the market. The Ghosn affair as a test of corporate transparency and accountability," Post-Print hal-04017068, HAL.

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    More about this item

    Keywords

    Fixed Income; Guarantees; Main Banks; Cost of debt; Credit ratings; Japanese capital markets; Corporate governance;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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