Common Lender, Ex-Banker Director, and Corporate Investment

Abstract

Due to the government-driven mergers of large banks, many competing firms in Japan ended up borrowing from a common lender. Using firm-level data, we find that the capital investments of competing firms that share a common lender decrease by 15% of the mean. When a common lender can exercise its voice through its former employees serving as firms’ executive directors, investments fall significantly further. Competing firms that share a common lender increase markups and profitability ratios, suggesting that the lender induces strategic coordination among its borrowers to reduce their competitive pressures. Firms use saved resources from weaker competition for cash cushions.