Hoshi, Kashyap, and Scharfstein (1990, 1991), Asako, Kuninori, Inoue, and Murase (1990), and Okazaki and Horiuchi (1992) investigated the validity of this theory for Japan based on the firm data. It is well-known in Japan that there are industry groups called keiretsu. The corporations belonging to industry groups can mitigate the agency costs for several reasons. First group corporations have close ties with affiliated banks and those banks are shareholders as well as bondholders, which reduces the conflicts among investors. Second group corporations have a long-term stable relationship with the affiliated banks and former bank employees are often placed in management positions of the corporations, which narrows the informational gaps between the bank and the corporations. Therefore it is expected that the agency cost is lower for the corporations in the industry groups than unaffiliated corporations. Hoshi et al. (1990, 1991) obtain evidence supporting this conjecture, while the evidence given by Asako et al. (1990) and Okazaki and Horiuchi (1992) is not so decisive.

If the assertions made above are correct, then we have strong implications on the role of assets as a collateral in business cycles. In the preceding section we gave some evidence that financial liberalization together with a rise of share prices in the middle of 80's shifted the source of financing for the large corporations from borrowing to equity or bonds and that the dependence on borrowings was strengthened for medium and small corporations which cannot have direct access to the capital market. In general the corporations of medium or small size do not belong to industry groups and hence the banks have not accumulated the enough information of those corporations on which judgment is made as to the decision of lending loans. However the asset values held by the corporations increased to a large extent in the middle of 80's due to a sharp rise in asset prices. It is conjectured that appreciating assets played a collateral role in borrowing and that it eased the agency costs. If it is the case, then the improvement of the balance sheet positions of medium or small corporations were indispensable to credit expansions and high growth rate of the investment during this period.

Now we turn to the evidence on our assertions. First we demonstrate from the statistics of the supplier of funds that the loans made for the small corporations indeed had the tendency to increase in the 80's. Figure 8-1 and 8-2 depict the share of the small enterprises in the total outstandings of loans and discounts of all banks in Japan. The share is increasing over time and it accelerated from the middle of 80's to 1989. Figure 9-1 and 9-2 show the proportions of the loans outstandings that are on the security of real estates and securities, respectively. The proportion of loans on the security of real estates declined rapidly from the middle of 70's to the middle of 80's and switched to an increasing trend. The proportion of loans the collateral of which is securities exhibits a similar pattern. It showed a continuous decline from the middle of 60's to the middle of 80's and the declining trend was reversed to an increasing one. Note that the increasing trend of both proportions coincides with the period of sharp rise in land and share prices.

To establish empirically the relationship between the proportions of collateral loans and the share