The Value of Banking Relationships During a Financial Crisis: Evidence from Failures of Japanese Banks
Previous literature suggests that banking relationships can enhance the value of client firms in
the presence of asymmetric information problems. Hence, severance of banking ties due to a
bank failure can have adverse consequences for the clients of the failed bank. In this paper, we
provide evidence on the value of banking relationships by examining the impact of three large
bank failures in Japan on their clients and the clients of surviving banks. We find that, as in
previous studies, the market value of customers of the failed banks is adversely affected at the
date of the failure announcements. In addition, the effects are related to the financial
characteristics of the client firms and their primary banks. Firms that have greater access to
alternative sources of funding experience a less severe adverse impact from bank failure
announcements. Similarly, clients of banks that are more profitable, better capitalized, and have
lower loan loss reserves suffer less from the failure announcements. However, we also find that
these effects are not significantly different from the effects experienced by all firms in the
economy. That is, the bank failures represent “bad news” for all firms in the economy, not just
for the customers of the failed banks.
