Discussion Paper No. 655

JAPANESE CORPORATE FINANCE:
WHAT FACTORS AFFECTTHE FINANCIAL DECISIONSOF JAPANESE FIRMS?:
A SURVEY RESULT
Nobuyoshi Yamori

March 2006

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

March 2006

Japanese Corporate Finance: What Factors Affect the
Financial Decisions of Japanese Firms?:
A Survey Result

Nobuyoshi Yamori
Graduate School of Economics, Nagoya University
Furo-cho, Chikusa-ku, Nagoya, Aichi 464-8601 Japan
Institute of Social and Economic Research, Osaka University
Mihogaoka, Ibaraki, Osaka 560-0047 Japan(tel.)(+81)52-789-4935, (fax)(+81)52-789-4924, e-mail: yamori@soec.nagoya-u.ac.jp

Abstract
In June 2005, a questionnaire survey was sent to 9000 companies in the Kansai Area
(Osaka, Kyoto and Hyogo), the second largest economic block in Japan, with 2041
companies responding. This article introduces the results of this questionnaire survey. The
greatest feature of this study is that, unlike previous works on traditional corporate finance,much information on unlisted companies is included. The dividend policy of Japanesecompanies, awareness of corporate governance, funding behavior, and bank selection
behavior were analyzed. As a result, we found that being a consolidated subsidiary or agroup member of an affiliation of companies greatly affects a company’s financial activities,
and that the capital adequacy ratio and size of the company are also important factors.
JEL Classification Code: G32, G20.
Key Words: Japanese small firms; Financial decision; Main banks; Dividend policy;
Corporate governance.

Japanese Corporate Finance: What Factors Affect the
Financial Decisions of Japanese Firms?:
A Survey Result

1. Introduction
Most research on corporate finance in Japan (e.g., Hoshi and Kashyap 2001, Kang andStultz 1996) has been conducted only on listed companies and there are very few studies
on unlisted companies due to the difficulty in obtaining data. However, according to asurvey conducted by the Ministry of Internal Affairs and Communication in 2001, of
4,700,000 companies (including sole proprietorships) in Japan, there are 4,690,000 smalland medium-sized companies and only 13,000 large companies 1 . Also in terms of thenumber of employees, 29,960,000 (70.2% of the total 42,660,000 employees) work forsmall and medium-sized companies. In other words, without conducting an analysis ofsmall- and medium-sized companies which constitute the majority of Japanese companies,
it is impossible to understand the characteristics of Japanese companies or the Japanese
economy. Therefore, an extensive questionnaire survey that covered small- andmedium-sized companies is necessary 2 . Consequently, we conducted an “management
survey of corporate finance issues in the Kansai Area” with the head offices of 9000
companies in the Kansai Area (Osaka, Kyoto and Hyogo Prefectures).
The gross production of the 3 prefectures in Kansai (FY2001) is JPY67.2 trillion in
total, accounting for 13.4% of the total production in Japan, and the area is the second
largest economic block in Japan after Tokyo. In addition, it is a common knowledge that
there are many small- and medium sized companies in the area. However, since thefailures of Kizu Credit Cooperative and Hyogo Bank in 1995, a number of small- andmedium-sized financial institutions went bankrupt in the Kansai Area, and Sumitomo Bank
(currently Sumitomo Mitsui Banking Corporation) and Sanwa Bank (currently the Bank ofTokyo Mitsubishi UFJ), city banks with head offices in Osaka, relocated their headquarters
to Tokyo after reorganization. Another city bank, Daiwa Bank (currently Resona Bank) was
nationalized, effective in 2003. In this way, the Kansai Area is also expected to be the area

1

“Small- and medium sized companies” are defined as companies with 300 regular employees
or less (or, 100 or less for wholesalers and service businesses, and 50 or less for retailers andcatering establishments) or, with a capital of JPY 300 million or less (or JPY 100 million or lessfor wholesalers and JPY 500 million or less for retailers, catering establishments and service
businesses).
2
Yamori and Baba (2001) analyzed the results of a questionnaire survey with listed companies
in Japan regarding their overseas listing strategies.

-1-most affected by the impact of changes to the financial system across the country.
This article is divided into the following sections: Section II explains the summaryof the questionnaire survey. Section III selects questions regarding the financial decisionof the companies and analyzes how the answers to those questions are affected by thecompanies’ attributes. Section IV is the conclusion.

2. Summary of the Management Survey of Corporate Finance Issues in the
Kansai Area
(1) Selection of Responding Companies
Companies managed in the Tokyo Commerce and Industry Research database were usedas the parent population, and, after excluding certain types of industry such as public
utilities, companies were classified into 4 groups based on the number of employees (1-20,
21-50, 51-100 and 101 or more). Next, 2250 companies were randomly selected from eachgroup, for a total of 9000 companies to which the survey form was to be sent. In June 2005,
the survey form was sent to the 9000 companies, and the responses from 2041 companies
received by July 1 were analyzed in this paper. Response rate was 22.68%. However,some companies did not respond to each corresponding question, and a non-response
was not included in the actual calculation of the figures and estimations, thus the numberof the companies analyzed differs depending on the question.
(2) Summary of the Survey Form
The questions could be roughly divided into 8 Parts. Part I asks about the attributes of theperson who responded to the survey. Part II asks about the attributes of the responding
company. Part III contains questions regarding overall management of the responding
company. Part IV inquires about overall financial policies. Part V inquires about therelationship with the main bank. Parts VI, VII and VII contain questions regarding overallbanking transactions, questions regarding methods of corporate assessment of small- andmedium-sized companies by financial institutions, and questions regarding the credit
guarantee system, respectively. Of these, the results of Part IV are mainly used for the
discussion of this article.
(3) Situation of the Responding companies
Table 1 shows the number of responding companies according to the number of employees.
The survey forms were sent to 2250 companies in each of the 4 categories based on thenumber of employees according to the rules for selection. Therefore, the size of the
responding companies in the table directly represents the level of response rate. As
expected, there were fewer responses from small companies with 1-20 employees.
However, as there were 372 responses from companies in this group, the opinions of awide range of companies can be expected. Of the total responding companies (2020-2-companies), the largest and smallest number of employees was 22,724 and 1, respectively,
and the average number of employees is 147.9.
The number of valid answers to the question on listing status was 1969. Of these,
74 (3.8%) companies were already “listed or public”. Therefore, the remaining approx.
1800 companies were unlisted. However, 40 of them replied that ”they have concrete plansfor public offering” and 160 desired to go public although they had no concrete plans.
Table 1
Distribution of Responding Companies by Number of Employees
1〜 20

101〜

Unknown

21〜 5051〜 100

372

554

574

520

21

18.2%

27.1%

28.1%

25.5%

1.0%

Note: Actual numbers and the percentages are shown in the upper and the lower rows
respectively.

3. Analysis of the Questionnaire Results
This section discusses and analyzes the survey questions regarding the financial
decisions of Japanese companies. However, the numbering of the questions below was left
the same as those of the original survey form. In addition, the survey form was originallyprepared in Japanese. The following questions were translated for the purpose of thisarticle.
Q7 What is the percentage of your capital adequacy ratio (＝ Shareholders’ Capital/Gross
Assets on the balance sheet)? (Approximate figures are acceptable. Please provide thefigures as of the end of the latest fiscal year.)
1. Capital adequacy ratio.

%

2. Liability exceeding assets
Of 1811 valid answers, 78 companies (4.3%) answered that they had liabilities in excess ofassets. The average capital adequacy ratio of responding companies which did not havean excess of liabilities was 33.2%, and the most common capital ratio for distribution wasless than 20%, as shown in Table 2.

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Table 2
Capital Adequacy Ratio
Total Number ofLess than

20% or more - Less

40% or more - Less

60% or more - Less

80% orResponses

20%than 40%than 60%

than 80%

more

1715

675

444

321

178

97

100%

39.4

25.9

18.7

10.4

5.7

Q8. Please circle the appropriate number from the following lines which best describes
your business achievement (profits before tax):
1. Posted profits for 2 consecutive fiscal years
3. Went from a profit to a deficit

2. Went from a deficit to a profit

4. Posted losses for 2 consecutive fiscal years

Profit conditions before tax as an indicator of business achievement were asked. 74.2% of
the respondents answered that they had posted profits for two consecutive fiscal years, so
the percentage of profit-making companies was 84.3% for the current fiscal year. Given thegeneral slowdown in business in Kansai, this was rather surprising. This may be due to theassumption that companies who were willing to answer the questionnaire had acomparatively good management strength, or as the database of companies to which thequestionnaire was sent did not cover all companies, companies with poor management
strength were likely not to be included; and approx. 200 companies that did not answer thisquestion might experience poor performance.
Table 3
Status of Profit Before Tax
Total Number ofPosted profits for 2

Went from a

Went from a

Posted losses for 2

Responses

consecutive fiscal years

deficit to a profit

profit to a deficit

consecutive fiscal years

1987

1474

201

170

142

100%

74.2

10.1

8.6

7.1

Q9

Regarding the most recent dividend payment, did you:
1. Pay dividends

2. Did not pay dividends

According to the results of the questionnaire survey, 839 companies (42.7%) paid
dividends, while 1125 (57.3%) did not.
There are many studies on corporate dividend policies 3 . For example, Gul(1999),
Hayashi and Jagannathan(1990), and Kato and Loewenstein(1995) conducted studies on
3Lease, et. al.(2000) made an extensive survey of studies to date.
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Japanese companies. However, these studies only studied listed companies. Of course, itis well known that in a perfect capital market, dividend policy does not affect enterprisevalue. However, even in listed companies, most business managers believe that thedividend policy is an important issue for corporate decision-making. Unlike listedcompanies, the condition of a perfect capital market may not apply to unlisted companies
but there are very few studies on unlisted companies.
Therefore, the kind of factors that determine payment or nonpayment of dividends
for the companies which responded to this questionnaire survey, including a large numberof unlisted companies, was investigated. A regression using a no-dividend dummy(NODIV) where 1 (one) is assigned as the dependent variable for responding companies
that did not pay a dividend, and 0 (zero) is assigned for responding companies that paid
dividends. Furthermore, in addition to listing status, the following various financial
conditions of the companies were used as independent variables.
First is the condition where profits before tax occurred over the past twoconsecutive 2 fiscal years as asked in Question 8. Q08A2 is a dummy variable where 1(one) is assigned to a company that went from a deficit to a profit (that is, companies
choosing Answer 2 of Question 8) and 0 (zero) otherwise. Similarly, Q08A3 is a dummy
variable where 1 (one) is assigned to a company that went from a profit to a deficit, and
Q08A4 where 1 (one) is assigned to a company that posted losses for two consecutive
fiscal years. Companies that posted profits for two consecutive fiscal years are used as abase, and the difference among these companies is shown as coefficients of these dummy
variables. Since companies with deficits are likely to pay no dividend, these dummy
variables are expected to be positive. Given the difficult financial situation, Q08A4’s
coefficient is expected to be the largest, followed by Q08A3 and then Q08A2.
Second, (although not described in this article) a dummy variable (Q10AA1) was
included where 1 (one) was assigned to companies that answered “severe” to the question
on latest funding and 0 (zero) to companies that answered otherwise. Since companies
with difficulty in funding wish to avoid dividend payment as it represents an outflow ofliquidity, the factor of this variable is expected to be positive.
Third, the latest sales growth (SGRW) was adopted as a measure to evaluatebusiness performance. SGRW greater than 1 (one) represents sales during the latest fiscal
year that exceed the results of the previous fiscal year. However, while some companies
with growing sales do not pay dividends because they have a number of attractive
investment opportunities, the likelihood to pay dividends also increases due to favorable
business performance. As such, it is impossible to determine the sign of this factor inadvance.
Fourth, the capital adequacy ratio (CAP) of a company was adopted 4 . Since
4

Companies which responded that their capital adequacy ratio exceeded 100 % were
excluded, as they are suspected to be erroneous. For instance, in case of the analysis shownin Table 4, 12 companies were excluded from the samples due to this condition.

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undercapitalized companies are likely to place priority on internal accumulation of capital,
the CAP factor is expected to be negative.
Fifth, the size of the company was added as an independent variable. In general,the larger the company is, the wider the gap between business managers andshareholders is. However, it is not always clear whether this will increase or decrease
dividends. Here, we used the natural logarithm of gross assets (ASSET) as a size variable.
Sixth, a company’s association with a business group may influence its dividend
policy. In this questionnaire we asked the company whether it is a consolidated subsidiarywith a parent company, a company with a parent company but not a consolidated
subsidiary (referred to as an “affiliated company”), or an independent company. Therefore,
Q04A1 is a dummy variable where 1 (one) is assigned to a consolidated subsidiary with aparent company and 0 (zero) otherwise, and Q04A2 is a dummy variable where 1 (one) is
assigned to an affiliated company and 0 (zero) otherwise. In other words, independentcompanies are used as the base. If a parent company desires to absorb funds from its
subsidiaries, the consolidated subsidiary is likely to pay dividends, and the factor of Q04A1
should be positive.
Last, there is a listed dummy. While there is a difference in the implementation
method of capital gains between listed and unlisted companies, in the case of unlistedcompanies, business managers often are major shareholders so corporate governance
may work differently from listed companies. Therefore, we use a listed dummy (LISTED)
where 1 (one) is assigned to a listed company and 0 (zero) otherwise.
In addition, due to the nature of dependent variables, the probit model estimation
was also conducted. Since not all companies answered all questions, the total number ofsamples was 1517 or less.
The results of the estimation are summarized in Table 4. Except for SGRW (sales
growth), A04A1 (subsidiaries) and LISTED, statistically significant factors could beobtained. That is to say, companies which are in deficit (namely, Q08A2, Q08A3, and
Q08A4) are likely to pay no dividend, and companies finding difficulties in funding(Q10AA1) or with a lower capital adequacy ratio (CAP) are likely to pay no dividend 5 .
Furthermore, smaller companies (ASSET) are likely to pay no dividend. In addition, though
there was no difference in dividend policies between consolidated subsidiaries andindependent companies (Q04A1), affiliated companies (Q04A2) were less likely to pay no
dividends as compared to independent companies.
The LISTED factor was not significant even at the 10% level, and no difference
was found between listed and unlisted companies. To confirm this result, cross terms
between all explained variables excluding LISTED and LISTED were added and the
5 Some companies reported positive but less than 1% capital ratio. We are afraid thatthey entered wrongly. So, we re-estimated the equation without companies reporting
less than 1% capital ratio, and confirmed that the results remain qualitatively
unchanged.

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non-dividend equation was re-estimated. In other words, whether the size of eachindependent variables is different between listed and unlisted companies was investigated.
However, no additional cross terms became significant. Therefore, listing status is notconsidered to be a key factor in dividend payment.
Table 4
Results of Non-dividend Function Estimation

Variable

Coefficientz-Statistic

C

4.312

11.213

Q08A2

0.430

3.192

Q08A3

1.028

6.354

Q08A4

1.045

4.564

Q10AA1

0.649

5.809

SGRW

0.036

0.235

CAP

-0.013-8.451

ASSET-0.340-12.125

Q04A1-0.091-0.965Q04A2-0.312-2.409LISTED-0.420-1.515Log likelihood
McFaddenR-squared-797.732
0.234

Total observations=1505.

Q15

Which of the following groups do you currently consider important as a stakeholder?

And, which stakeholder will you emphasize from now?

Please circle the appropriate

number(s) from the following for your current situation and future plans.
1. General customers
2. Employees
3. Individual investors
4. Domestic institutional investors
5. Foreign institutional investors
6. Main Bank
7. Business partners
8. Affiliated company group
9. Owner
10. Management-7-11. Other ()

To understand the basic stance on corporate governance, companies were asked about
which stakeholder, present and future, was considered most important. Answers areshown in Table 5. For both questions, business partners were chosen as the mostimportant stakeholders, followed by employees and general customers.
Difference in important groups is also quite interesting. Therefore, an analysis
using the explanatory variables previously used to estimate the non-dividend function was
conducted. The dependent variable of the first estimation is a dummy variable (Q15A1)
where 1 (one) is assigned to companies that chose general customers as the current mostimportant bodies and 0 (zero) to companies that did not choose general customers.
Similarly, an estimation using the probit model in order to explain 11 variables in total, suchas a dummy variable (Q15A2) where 1 (one) is assigned to companies that chose
employees was also conducted.
The results of the estimation are summarized in Table 6. A number of variables
were found to influence the choice of the most important stakeholder. Companies which
recently had experienced difficulties in funding (Q10AA1) were likely to attach importanceto main banks and affiliated company groups, and in contrast, are less likely to put a highpriority on employees. This may be because companies with difficulties in funding need the
support of financial institutions or affiliated companies, while cutting back on personnel.
A company with higher capital adequacy ratio (CAP) tends to attach importance togeneral customers but to place less importance on main bank. This may be because
companies with a higher capital adequacy ratio are less likely to be dependent on financial
institutions. The larger the size of the company (ASSET) is, the more likelihood it is toplace importance on main bank. This result is surprising as smaller companies are
expected not to have someone else to rely upon other than the main bank.
Whether the company is a consolidated subsidiary (Q04A1) or an affiliatedcompany (Q04A2) has a significant influence in determining the most important group. In
case of consolidated subsidiaries, importance is attached to affiliate company groups, andless importance is placed on employees, main bank, or business partners. Placing strongemphasis on affiliate company groups can be expected since important labor, financial andoperational decisions are made by the parent company. This is almost the same foraffiliated companies, and the only difference is that a number of affiliated companies
answered that they place importance on the management.
Lastly, the listing status also had great influence in terms of which group is
considered important. Listed companies are likely to focus on individual investors andinstitutional investors, and tend to place less value on employees and business partners.

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Table 5
Most Important Entity
Present

FutureNumber of

Number ofPercentage

responses

Percentage
responses

General Customers

863

46.2

882

47.6

Employees

908

48.6

942

50.8

Private Investors

20

1.1

51

2.8

22

1.2
24

1.3

4

0.2

Domestic Institutional
Investors
Overseas Institutional
50.3

Investors
Main Bank

239

12.8

208

11.2

Business Partners

999

53.5

961

51.9

Affiliated Company Group

123

6.6

129

7

Owner

118

6.3

89

4.8

Management

79

4.2

83

4.5

Other

35

1.9

34

1.8

Table 6
Decision Function of the Most Important Entity<Attached to the back>Q16 Please choose 3 from the following methods of external funding which you consider
important, listing them in order of importance:
1. Procurement from the main bank
2. Procurement from financial institutions other than the main bank
3. Procurement from public-sector financial institutions
4. Institutional loans from municipalities, etc
5. Borrowing from a business partner (trade credits)
6. Short-term CPs
7. Long-term corporate bonds
8. Convertible bonds
9. Common stock
10. Subordinated bonds and preferred shares
11. Securitization of leases, credits and account receivables-9-12. A Pledge of goods in stock
13. Other
For the percentage of the most important item selected (Table 7), most companies, 2 out of
3, chose “procurement from the main bank”, followed by companies which chose
procurement from public-sector financial institutions.
A regression on the differences in funding sources by attributes of the companies
was conducted. The following explanatory variables were used. Q16AF1 is a dummy
variable where 1 (one) is assigned to companies that chose the “main bank” as the mostimportant, and 0 (zero) to companies that chose otherwise. Similarly, Q16AF2 is a dummy
variable where 1 (one) is assigned to companies that chose “procurement from financial
institutions other than the main bank” as the most important and 0 (zero) to companies thatchose otherwise. Other variables were similarly defined, and options 3 and 4 were grouped
together since they both use a public source (A16AF3_4) and options 5 to 10 weregrouped together as financing from the market (A16AF6_10). Furthermore, 11 and 12 weregrouped together as they both are securitization (Q16AF11_12). An estimation by the
probit model was performed.
The results are summarized in Table 8. It is surprising that companies who posted
losses for two consecutive fiscal years (Q08A4) placed emphasis on funding from thefinancial market, because information asymmetry is particularly large for such companies
and funding from the market appears to be disadvantageous. Companies with higher sales
growth (SGRW) tend to attach importance to funding from the financial market. Companies
with higher capital adequacy ratio (CAP) are likely to procure funds from their main banks,and companies with lower capital adequacy ratio tend to focus on financial institutions
other than the main bank and public financing.
Furthermore, the larger the company (ASSET) becomes, the more likely
importance is attached to the relationship with the main bank, while the smaller the assets
are, the more focus there is on public financing. Consolidated subsidiaries (Q04A1) arelikely to place importance on trade credits and securitization rather than the main bank andpublic financing. Finally, for listing status, listed companies naturally place importance onfunding from the financial market and are less likely to attach importance to the main bank.

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Table 7
Important Financing Method
1

2

3

Total

1785

100.0

1654

100.0

1444

100.0

Procurement from the main bank

1167

65.4

278

16.8

138

9.6

130

7.3

669

40.4

298

20.6

Procurement from public-sector financial institutions

266

14.9

433

26.2

414

28.7

Institutional loans of municipalities, etc

42

2.4

115

7.0

192

13.3

Borrowing from business partners

20

1.1

9

0.5

21

1.5

Short-term CPs

5

0.3

9

0.5

12

0.8

Long-term corporate bonds

26

1.5

51

3.1

132

9.1

Convertible bonds

3

0.2

16

1.0

17

1.2

Common shares

31

1.7

23

1.4

40

2.8

Subordinated bonds and preferred shares

4

0.2

3

0.2

6

0.4

14

0.8

32

1.9

98

6.8

Pledging of goods in stock

0

0.0

3

0.2

14

1.0

Other

77

4.3

13

0.8

62

4.3

Procurement from financial institutions other than the mainbank

Securitization of leases, credits and account receivables
etc

Table 8
Decision factor of the Most Important Financing Method<Attached to the back>Q17 What is your plan for borrowing from financial institutions?

Please circle theappropriate number:
1. Plan to decrease borrowings

2. Unchanged →go to Q18

3. Plan to increase

borrowings →Q18
Of 1804 valid responses, 1083 companies (60.0%) chose ”plan to decrease”, 598
chose ”unchanged”, and 123 chose ”plan to increase”. We examined what factors affected
these borrowing policies.
As the dependent variable, we used a dummy variable (Q17A1) where 1 (one) was
assigned to companies that chose ”plan to decrease” and 0 (zero) otherwise. The
explanatory variables are the same as those previously used in the estimation of thenon-dividend factor. According to the estimation results, the only significant factors were
Q10AA1 which represents difficulty in funding and Q04A2 which represents the status as-11-

an affiliated company. In other words, only companies with difficulties in funding planned todecrease borrowings. This may be because these companies could not increase
borrowings and be forced to pay back debts.
At the same time, another estimation using a dummy variable (Q17A3) where 1(one) is assigned to companies that chose ”plan to increase” and 0 (zero) otherwise as andependent variable was also performed. According to the results, only the capital
adequacy ratio (CAP) and affiliate companies dummy (Q04A2) were significant at the 10%
level. In other words, companies with a higher capital adequacy ratio are less likely tochoose ”plan to increase borrowings”. This suggests that companies with sufficient equity
capital do not rely on external funds.
Table 9Decision Function for Borrowing from Financial Institutions
Planning to decrease
Planning to increase

Variable

Coefficient z-Statistic Coefficient z-Statistic

C

0.048

0.144

-1.582-3.375Q08A2-0.050-0.410

0.010

0.053

Q08A3

-0.148-1.103

0.066

0.334

Q08A4

-0.277-1.587

0.298

1.297

Q10AA1

0.180

1.854

0.093

0.682

SGRW

0.044

0.311

0.165

0.887

CAP

-0.002-1.034-0.003-1.453

ASSET

0.020

0.817

0.001

0.015

Q04A1

-0.098-0.981-0.072-0.460Q04A2-0.344-2.833

0.295

1.810

LISTED-0.203-1.095-0.344-1.001

Log Likelihood
McFaddenR-squared
Observations=1361.

Q17-1-911.599-351.509

0.010

0.016

If you chose ”1. plan to decrease borrowings” in Q17, please select the first andthe second most appropriate reasons from the following:
1. The borrowing burden is substantially heavy due to deflation
2. Funding costs have increased
3.

Have an excess of cash reserves but no new investment opportunity

4

To raise stock price5.

Borrowings are not good
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6.

To reserve borrowing capacity in preparation of a new opportunity

7.

Under pressure to repay borrowings from financial institutions

8.

Limits have been placed on credits by banks

Valid responses for this question were 975(1 st ) and 838 (2 nd ), respectively. As shown in
Table 10, most companies chose ”to reserve borrowing capacity in preparation of a newopportunity”. 555 companies, representing approx 60% of the total, chose this as the firstor the second answer. A questionnaire survey of US companies by Grahan and Harvey(2001) also reported that there was emphasis on financial flexibility among debt policy
factors. This can be seen as a common tendency between Japan and the US. As shown in
Table 10 , this is followed by ”having an excess of cash reserves but no new investment
opportunity” and “the borrowing burden is substantially heavy due to deflation”.
Table 10
Reasons to Decrease Borrowings

The borrowing burden is substantially heavy
due to deflation
Funding costs have increased
Having an excess of cash reserves but no newinvestment opportunity
To raise the stock priceBorrowings are not good
To reserve borrowing capacity in preparation ofa new opportunity
Under pressure to repay borrowings fromfinancial institutions
Limits have been placed on credits by banks

1
Number of
responses%

2
Number of
responses

%

196

20.1

102

12.2

61

6.3

62

7.4

229

23.5

119

14.2

10

1.0

10

1.2

190

19.5

185

22.1

250

25.6

305

36.4

25

2.6

19

2.3

14

1.4

36

4.3

Q18 To what extent do you agree with the description: ”it is ideal to operate businesswithout owing debts”? Please circle the appropriate number:
1.

Strongly agree

2. Somewhat agree

3. Hardly agree

4. Totally disagree

Theoretically, as long as the investment opportunity produces a higher rate of earning than
the interest payable, borrowing money is favorable. However, as borrowings increase, thecompany will be strapped with interest repayment issues. In Japan, which traditionally
maintains a lifetime employment system, business managers shun the risk of corporate
failure. Of 1878 responding companies, ”strongly agree” ranked 28.6%, “somewhat agree”
60.1%, ”hardly agree” 9.9%, and ”totally disagree” 1.3%. It can be seen that mostcompanies believe that operating business without owing debts is ideal.
A regression using the ordinary least-squares method was conducted. In the-13-estimation, the results of the 4-scale assessment on the extent of agreement with thedescription: “it is ideal to operate business without owing debts” is a dependent variable.
As a result shown in Table 11, significant factors were companies’ size (ASSET) and thecapital adequacy ratio (CAP). As the large-scale company factor became significantly
positive, it could be seen that large-scale companies do not always believe that it is ideal
to operate business without owing debts. It is quite natural that large-scale companies do
not agree with the irrational description which completely denies owing debts, as theyshould have more financial expertise. On the other hand, the coefficient of the capital
adequacy ratio was significantly negative. This means that companies with higher capital
adequacy ratio strongly maintain business operations without owing debts. This suggeststhat such orientation toward no debt business management is shown in actual practice.
Table 11
Extent of Agreement with the Description: “It is ideal to operate business without owing
debts”

Variable

Coefficient t-Statistic

C

1.578

9.861

Q08A2

0.097

1.597

Q08A3

0.021

0.320

Q08A4

0.022

0.271

Q10AA1-0.069-1.458

SGRW

0.072

1.067

CAP

-0.004-5.230

ASSET

0.027

2.289

Q04A1

-0.047-1.028

Q04A2

0.035

0.580

LISTED

0.074

0.811

Adjusted

0.023

R-squared
Observations=1414

Q20 Do you plan to use direct finance?
1. No

2. Yes→go to Q21

254 companies (13.1%) answered that they “plan to use” direct finance, while 1678(86.9%)
answered ”no”. A regression was performed using a dummy variable (Q20A1) where 1(one) is assigned to companies that “do not plan to use direct finance” and 0 (zero) to-14-

companies that “plan to use” direct finance as an dependent variable, and the explained
variables are the same that have been previously used to represent the attributes ofcompanies. The results of the estimation are shown in Table 12.
Significant variables were the capital adequacy ratio (CAP), the consolidated
subsidiary dummy (Q04A1) and listed dummy (LISTED). The capital adequacy ratio wassignificantly positive, and, similar to question Q18, it could be seen that companies withhigher capital adequacy ratio were reluctant not only to indirect but also direct finance. The
consolidated subsidiary dummy is also significant as consolidated subsidiaries may notraise funds for themselves. The listed dummy was significantly negative, signifying thatmost listed companies are willing to use direct finance.
Table 12Analysis of Attributes of Companies Which Do not Intend to Use Direct Finance

Variable

Coefficient z-Statistic

C

0.962

2.389

Q08A2

-0.073-0.494

Q08A3

0.000

-0.001Q08A4-0.002-0.008Q10AA1-0.061-0.531

SGRW-0.300-1.864

CAP

0.008

4.255

ASSET

0.014

0.481

Q04A1

0.918

5.301

Q04A2

0.255

1.572

LISTED-0.678-3.261

Log Likelihood
McFaddenR-squared-527.023
0.066

Observations=1462.

Q20-1

If you chose ”1. no” in Q20.

Please circle appropriate number from the following

choices that describes the main reason why you do not plan to use direct finance:
1. Have sufficient equity capital
2. Funding needs are met by indirect financing (from banks, etc)
3. Unsuitable for small scale/short-term funding
4. Not familiar with direct finance
5. Other ()-15-

Of 1678 responding companies that did not plan on using direct finance, 1616 companies
replied to this question. Most companies, 52.4%, answered that their “funding needs are
met by indirect financing”, followed by ”sufficient equity capital” (23.3%), ”not familiar withdirect finance” (12.3%), ”unsuitable for small scale/short-term funding” (6.6%) and ”other”(5.4%).
In order to analyze selection determinants, a regression analysis was conductedby the probit model. The dependent variable Q20AB1 is a dummy variable where 1 (one) is
assigned to companies that chose ”we have enough equity capital” as “1” and 0 (zero)otherwise. Similarly, except for the “other” option at the bottom, Q20AB2, Q20AB3 andQ20AB4 were defined in the same way.
The results are summarized in Table 13. Most companies facing difficulties inlatest funding(Q10AA1) cite “unsuitability in size or funding needs” and unfamiliarity as
reasons. It is easily understood that companies with a higher capital adequacy ratio
chose ”sufficient equity capital”. Large-scale companies are more likely to answer “needs
met by indirect finance” 6 . In addition, large-scale companies are less likely to answer ”notfamiliar with direct finance”. Graham and Harvey(2001) pointed out, in their questionnaire
survey conducted on US companies, that there is a correlation between the size of acompany and its financial knowledge and that this may be a factor in the company size
anomaly. A similar possibility can be pointed out in Japan. Finally, most listed companies
answered that they had ”sufficient equity capital”.
Table 13
Reasons Why Direct Finance is not used.
<Attached to the back>Q22

Do you have a cross-shareholding relationship with any business corporation or

financial institution? Please circle the appropriate number in the answer column.
It is well known that cross-shareholding is quite common among listed companies in Japan,
and cross shareholding constitutes the core of corporate grouping. There are many studies
on cross-shareholding and corporate affiliation at the listed company level (e.g., Osano,
1996; Flash 1996). However, there are few studies on mutual shareholding of unlistedcompanies.
According to answers to Q22, 258 (14.1%) out of 1835 companies answered thatthey had cross shareholding relationships with business corporations, and 127 (7.0%) out

6 However, it is notable that this analysis is conducted only on companies which did notplan to use direct finance.
-16-

of 1815 companies with financial institutions. More companies have cross shareholding
relationships with business corporations than with financial institutions.
To consider what kind of firms tend to have cross shareholding relationships, weestimate the equation, using a dummy variable (Q23AA) where 1 (one) is assigned tocompanies that said that they had cross shareholding relationships with businesscorporations and 0 (zero) to companies that answered ”No” or “Don’t know”. As shown in
Table 14, a smaller number of companies that posted losses for two consecutive fiscal
years (Q08A4) had cross shareholding relationships, while most large-scale companies
held shares mutually. In addition, listed companies, as well as affiliated companies arelikely to have cross shareholding relationships. On the other hand, consolidated
subsidiaries are less likely to have cross shareholding relationships.
A similar analysis was conducted on cross shareholding with financial institutions.
In this case, it was also shown that a number of large-scale companies and listedcompanies have cross shareholding relationships with financial institutions. Furthermore, it
is notable that the coefficient of consolidated companies dummy (Q04A1) is significantly
negative, while that of affiliated companies (Q04A2) is not significant. In addition, listedcompanies more likely have cross shareholding relationship with financial institutions.
Table 14
Determinant for Cross Shareholding

Variable

Cross shareholding with Business

Cross shareholding with Financial

Corporations

Institutions

Coefficientz-Statistic

Coefficientz-StatisticC-3.317-7.168-4.958-6.952

Q08A2

0.005

0.030

-0.256-0.893Q08A3-0.152-0.842-0.072-0.273Q08A4-0.637-2.104

0.148

0.497

Q10AA1

0.017

0.128

0.065

0.352

SGRW

-0.155-0.755-0.334-1.013

CAP

0.002

1.264

0.001

0.259

ASSET

0.190

5.932

0.301

6.328

Q04A1

-0.253-2.043-1.365-3.936

Q04A2

0.491

3.522

-0.329-1.249LISTED

0.943

4.771

1.592

6.967

Log Likelihood-523.983-239.597

0.134

0.369

McFaddenR-squared

Observation=1406.
-17-

Q23 Do you currently have a main bank? Please circle the appropriate number:
1. Yes

2. No

One characteristic of the Japanese financial system that has been pointed out is theexistence of a long-term stable relationship between the bank and the company, commonly
known as the main bank relationship (Hoshi and Kashyap 2001). Generally speaking, themain bank is the largest lending bank and is also a major shareholder for the company.
The main bank sometimes sends in directors to the company. However, such strict
interpretation of a main bank was not defined prior to requesting an answer, andcompanies were asked whether they had ”a main bank” without any limitations. As such,the idea of a main bank may differ slightly depending on the responding company, but thequestion took advantage of the questionnaire survey feature of corporate awarenessrather than simple numeric values.
As a result, of 2015 valid answers, 1799 companies (89.3%) responded that they
have “a main bank”, while 216(10.7%) answered that they did not. The types of companies
that have a main bank was examined by a regression model using a dummy variable(Q23A1) where 1 (one) is assigned to companies with a main bank and 0 (zero) otherwise.
According to the results of the estimation as shown in Table15, 3 variables,
namely size, the consolidated subsidiary(Q04A1) and the affiliated company (Q04A2)
variables were significant. A significantly positive coefficient was obtained for the size
variable, meaning that large-scale companies are likely to have a main bank. On the other
hand, coefficients of Q04A1 and Q04A2 are negative, meaning that for consolidated
subsidiaries and affiliated companies, they do not have main banks because their parent
companies carry out the financial function.

-18-

Table15

Attributes of Companies that have a Main bank

Variable

Coefficient z-Statistic

C

0.910

2.243

Q08A2

0.183

1.052

Q08A3

-0.170-1.047Q08A4-0.286-1.426Q10AA1-0.011-0.087

SGRW-0.086-0.532CAP-0.003-1.568

ASSET

0.065

2.154

Q04A1

-0.781-7.478Q04A2-0.381-2.551

LISTED-0.193-0.770

Log Likelihood-481.792

McFaddenR-squared

0.064

Observations=1509.

Q24

Please circle the appropriate number of the business category of your main bank:

1. City bank
2. Trust Bank/now-defunct Long-term Credit Bank
3. Regional Bank
4. Second-tier Regional Bank
5. Cooperative Bank (Shinkin Bank)
6. Credit Cooperation
7. Foreign Bank
8. Government-affiliated Financial Institution
9. Other ()

Regarding the business category of the main bank, 1085 (61.6%) companies chose city
banks, followed by 284 (16.1%) for Regional Banks, and 259 (14.7%) for Cooperative
Banks. Only a few companies chose others, 58 (3.3%) for Government-affiliated Financial
Institutions, 53 (3.0%) for Second-tier Regional Banks, 7 (0.4%) for Credit Corporations
and 1 (0.1%) for Foreign Banks. City banks have a high share because city banks such as
Sumitomo, Sanwa, Daiwa and Taiyo Kobe had held head offices in Osaka and Hyogo,
where this questionnaire survey was conducted. Also, since many second-tier regional-19-

banks in Kansai went bankrupt, their share is slightly lower.
Next, how companies chose the business category of their main banks was
examined. Here, options were sorted and a regression was conducted for 3 explained
variables: a dummy variable (Q24A1_2) where 1 (one) is assigned for companies whose
main bank is a major bank (city, trust and long-term credit bank) (that is, companies thatanswered 1 or 2) and 0 (zero) otherwise; a dummy variable (Q24A3_4) where 1 (one) is
assigned for companies whose main bank is a local bank (regional or second-tier regionalbank) and 0 (zero) otherwise; and, a dummy variable (Q24A5_6) where 1 (one) is assigned
for companies whose main bank is a cooperative financial institution (credit bank or
corporation) and 0 (zero) otherwise.
The results are shown in Table 16. Status of recent profits (Q08A2, Q08A3 andQ08A4) did not influence the selection of the business category of the main bank. This isnatural because main bank relationship is long term. Companies facing difficulties infunding are more likely to choose cooperative financial institutions as their main bank. The
causal relationship may be reversed here; since asset assessment of major banks is strict,companies with weak financial condition may choose cooperative financial institutions as
their main bank. In fact, companies with higher capital adequacy ratio choose a major bankas their main bank, and, in contrast, companies with lower capital adequacy ratio choose acooperative financial institution as their main bank. Large-scale companies are likely tochoose a major bank and in contrast, smaller companies choose a cooperative financial
institution. Companies with higher sales growth often may choose cooperative financial
institutions as their main banks because most of them are in relatively early stages ofgrowth. Lastly, consolidated subsidiaries and affiliated companies often choose a majorbank as their main bank. This is probably because they choose the same bank as theirparent company.

-20-

Table 16
Type of Banks Chosen as the Main bank
Major Bank
Variable

Cooperative Financial

Local Bank

Institution

Coefficientz-Statistic

Coefficientz-Statistic

C-2.462-6.376

1.032

2.558

1.465

3.079

Q08A2

0.103

0.778

-0.001-0.008-0.229-1.348Q08A3-0.089-0.609

0.070

0.448

-0.224-1.131Q08A4-0.081-0.434

0.222

1.160

-0.205-0.896Q10AA1-0.338-3.348-0.058-0.519

0.529

4.508

SGRW

-0.175-1.004-0.064-0.326

0.468

2.164

CAP

0.007

4.126

-0.003-1.937-0.006-2.848

ASSET

0.236

8.504

-0.143-4.942-0.255-7.153

Q04A1

0.572

4.891

-0.397-3.009-0.567-3.167

Q04A2

0.334

2.420

-0.101-0.681-0.475-2.303

LISTED

0.449

1.483

-0.300-0.999-7.0730.000

Log Likelihood
McFaddenR-squared

Coefficientz-Statistic-751.034-608.992-410.000

0.117

0.045

0.145

Observations=1320.

4. Conclusion
This article analyzed the determinants of financial activities of Japanese companies basedon the results of the questionnaire survey sent to 9000 companies in Kansai in June 2005.
This questionnaire survey was quite extensive and response was received from 2041
companies including small- and medium-sized unlisted companies. The dividend policy ofJapanese companies, awareness of corporate governance, funding behavior and bankselection behavior, were analyzed in this paper. As a result, the paper found that the status
as a consolidated subsidiary or a group member of an affiliation of companies greatly
influences the financial activities of a company, and that the capital adequacy ratio and thesize of the company are also important factors.
However, this one-time questionnaire survey could not fully evaluate the meaningof the answers to each question absolutely. Furthermore, it is impossible to determine
whether the results at this time are applicable to Japanese companies in general, or only tocompanies in the Kansai Area. Similar questionnaire surveys should be conducted on an
ongoing basis to examine the impact of changes in the economic environment. In addition,
it is also necessary to conduct a questionnaire survey in various regions in Japan as well-21-

as overseas, in order to identify financial characteristics according to region. Finally, as
pointed out by Graham and Harvey (2001), although such questionnaire surveys can solicit
opinions from companies, there is no guarantee that their answers correspond to theiractions. In this questionnaire survey, we often find that several answers are consistent with
their actions. However, a further analysis of the actual actions of the companies isnecessary in the future.

<Acknowledgements>
I would like to express my appreciation to the Regional Finance Research Group of the
Research Institute of Economy, Trade and Industry (Chief Examiner: Professor Yoshiro
Tsutsui, Osaka University) for their support for this questionnaire survey, which is the basisof this article.

<References>
Flath, D. I. (1996) “The Keiretsu Puzzle,” Journal of the Japanese and International
Economies 10(2): 101-21.
Graham, J. R., and C.R. Harvey (2001) “The theory and practice of corporate finance:
evidence from the filed,” Journal of Financial Economics 60, 187-243.
Gul, F. A. (1999) “Growth Opportunities, Capital Structure and Dividend Policies in Japan,”
Journal of Corporate Finance 5(2): 141-68.
Hayashi, F., and R. Jagannathan (1990) “Ex-Day Behavior of Japanese Stock Prices: New
Insights from New Methodology,” Journal of Japanese and International Economics
4, 401-427.
Hoshi,T. and A. K. Kashyap (2001) Corporate financing and governance in Japan: Theroad to the future, Cambridge and London: MIT Press.
Kang,J. K. and R. M. Stulz (1996) “How Different Is Japanese Corporate Finance? An
Investigation of the Information Content of New Security Issues,” Review of
Financial Studies 9(1): 109-39.
Kato, K., and U. Loewenstein (1995) “The Ex-Dividend-Day Behavior of Stock Prices: The
Case of Japan,” Review of Financial Studies 8, 817-847.
Lease, R. C., K. John, A. Kalay, U. Loeweinstein, and O H. Sarig, (2000) Dividend Policy,
Harvard Business School Press, Boston.
Osano, H. (1996) "Intercorporate Shareholdings and Corporate Control in the JapaneseFirm," Journal of Banking and Finance, Vol.20, pp.1047-1068.
Yamori, N. and T. Baba (2001) “Japanese Management Views on Overseas Exchange
Listings: Survey Results,” Journal of International Financial Management andAccounting 12-3 286-316.

-22-

Table 6
Decision Function of the Most Important Body
Overseas

Domestic
GeneralAffiliatedBusiness

PrivateEmployees

Customers

Institutional

Institutional

Main bankCompany

Owner

Management

Partners

Investors
Investors

Investors

Group

Variable

Coefficientz-Statistic

Coefficientz-Statistic

Coefficientz-Statistic

Coefficientz-Statistic

Coefficientz-Statistic

Coefficientz-Statistic

Coefficientz-Statistic

Coefficientz-Statistic

Coefficientz-Statistic

Coefficientz-Statistic

C-0.582-1.890

0.001

0.004

-2.299-2.318-1.799-1.834-4.265-1.471-2.314-5.003-0.032-0.102-2.696-4.708-1.738-3.185-0.569-0.916

Q08A2

0.013

0.110

0.003

0.027

0.262

0.711

0.108

0.300

-6.728

0.000

0.183

1.198

0.105

0.903

-0.436-1.819-0.403-1.590-0.286-1.114

Q08A3

0.022

0.172

-0.013-0.101

0.429

1.250

0.032

0.074

-6.308

0.000

0.166

1.001

-0.068-0.545-0.162-0.696

0.265

1.480

-0.422-1.364

Q08A4

0.152

0.949

-0.136-0.840-18.8810.000-0.052-0.092-6.248

0.000

0.228

1.143

-0.016-0.100-0.074-0.240-0.171-0.596-0.292-0.869Q10AA1-0.061-0.661-0.288-3.107-0.111-0.274-0.223-0.551-5.722

0.000

0.554

5.080

0.046

0.503

0.395

2.400

0.010

0.064

0.025

0.142

SGRW

0.193

1.470

0.088

0.667

0.264

0.814

0.025

0.063

-0.574-0.322-0.369-1.623-0.117-0.850

0.082

0.453

-0.388-1.309-0.413-1.152

CAP

0.003

2.137

0.000

0.192

0.006

1.278

0.004

0.913

-0.011-0.864-0.013-5.891

0.000

0.051

0.004

1.463

0.002

0.980

0.002

0.699

ASSET

0.012

0.522

-0.004-0.185-0.063-0.877-0.079-1.135

0.175

0.977

0.154

4.773

0.021

0.956

0.020

0.481

0.042

1.148

-0.069-1.609Q04A1-0.125-1.446-0.245-2.822-0.574-1.305-0.150-0.460-6.7960.000-0.981-5.500-0.202-2.3541.616

12.317-0.097-0.660-0.257-1.294

Q04A2-0.174-1.486-0.045-0.386-19.008

0.000-0.009-0.025-6.9260.000-0.427-2.284-0.184-1.582

0.970

5.393

0.280

1.675

0.361

1.994

LISTED

0.154

0.874

-0.502-2.750

1.858

5.109

2.036

5.824

0.923

1.133

-0.401-1.525-0.726-3.914

0.220

0.728

-0.788-1.893-6.0580.000

Log likelihood
McFadden R-squared-1031.658-1037.600-69.542-78.581-14.856-479.921-1040.866-282.399-324.471-222.956

0.007

0.013

0.319

0.317

0.315

0.135

0.012

0.256

0.027

0.044

Observations=1521-23-

Table 8
Decision Function of the Most Important Funding Method

Financial Institutions

Main bank
Variableother than Main bankPublic financing

Inter-company credits

Financial market

Securitization

Coefficient z-Statistic Coefficient z-Statistic Coefficient z-Statistic Coefficient z-Statistic Coefficient z-Statistic Coefficient z-Statistic

C-0.355-1.030-2.276-4.492

1.497

3.563

-2.774-2.623-2.721-4.481-3.862-2.832Q08A2-0.059-0.469-0.367-1.707

0.285

1.994

-0.024-0.058-0.445-1.377

0.365

0.988

Q08A3

-0.067-0.493-0.284-1.283

0.195

1.233

0.386

1.139

0.003

0.013

-0.040-0.087Q08A4-0.249-1.425-0.437-1.272

0.191

0.948

0.301

0.563

0.580

2.296

-6.1490.000

Q10AA1-0.105-1.075-0.087-0.598

0.211

1.902

-0.094-0.285-0.096-0.485

0.086

0.238

SGRW

-0.312-2.042

0.208

1.167

-0.008-0.043

0.418

1.773

0.392

2.149

-0.832-1.200

CAP

0.002

1.396

-0.008-3.138-0.002-1.229

0.000

0.063

0.001

0.223

-0.001-0.254

ASSET

0.098

3.953

0.077

2.069

-0.210-6.783-0.050-0.629

0.039

0.871

0.160

1.653

Q04A1

-0.527-5.496-0.011-0.079-0.693-4.274

1.452

5.542

-0.268-1.332

0.817

3.237

Q04A2

0.150

1.165

0.018

0.100

-0.263-1.621-5.3520.000-0.078-0.332-6.1590.000

LISTED-0.929-4.970-0.094-0.352-0.442-1.010-6.186

0.000

1.320

5.517

0.514

1.131

Log Likelihood
McFaddenR-squared-850.754-365.460-518.996-70.984-216.332-55.662

0.039

0.034

0.106

0.291

0.154

0.191

Observations=1372.

-24-

Table 13
Reasons Why Direct Finance is not Used

Unsuitable for small

Sufficient equity

Met by indirect finance scale / short-term

capitalVariable

Unfamiliar

financing

Coefficient z-Statistic Coefficient z-Statistic Coefficient z-Statistic Coefficient z-Statistic

C-0.847-2.039-0.527-1.457-2.344-3.829

0.758

1.476

Q08A2

-0.007-0.041-0.298-2.229-0.014-0.067

0.398

2.477

Q08A3

-0.380-1.994-0.016-0.112

0.164

0.775

0.330

1.903

Q08A4

0.509

2.350

-0.521-2.697-0.663-1.537

0.308

1.349

Q10AA1-1.195-5.909-0.341-3.173

0.672

4.480

0.678

5.548

SGRW

0.129

0.743

0.046

0.292

0.155

0.636

-0.570-2.049CAP

0.020

11.369-0.010-6.493-0.005-1.722-0.010-4.392

ASSET-0.066-2.205

0.098

3.783

0.051

1.147

-0.110-3.095

Q04A1

0.732

6.974

-0.721-7.411-0.228-1.321-0.435-2.710

Q04A2

0.072

0.461

-0.052-0.389-0.082-0.361-0.138-0.713

LISTED

0.597

2.743

-0.553-2.663

0.068

0.199

-5.9900.000

Log Likelihood
McFadeenR-squared-551.152-779.282-239.774-354.929

0.203

0.081

0.068

0.166

Observations=1228.

-25-