Effects of Lending Relationships with Government Banks on Firm Performance: Evidence from a Japanese government bank for small businesses

Employing massive contract- and firm-level data provided by the Small and Medium Enterprise (SME) Unit of the Japan Finance Corporation (JFC), one of the largest government lending institutions for SMEs, and linking the data with other firm-level data from a business credit information company, we empirically examine (1) the lending behavior of JFC to SMEs, (2) the effects of JFC's lending on the credit availability and the ex-post performance of its borrowers, and (3) the role of JFC's information production. As for (1), JFC's lending behavior, we find (1-a) a statistically significant association between JFC's lending decision and a variety of variables including those from borrowers' financial statements, (1-b) JFC's counter-cyclical lending behavior to SMEs, and (1-c) a reduced emphasis on loans collateralized by real estate properties in recent years. As for (2), effects of JFC's lending, we find (2-a) its significant positive impact on borrowers' credit availability, capital investment, and employment, (2-b) occasional complementarities between JFC loans and loans provided by other financial institutions, and (2-c) no definitive evidence for its positive impact on the borrowers' ex-post performance including their profitability and the probabilities of having financial distress. As for (3), JFC's information production, we find evidence suggesting that JFC's internal credit ratings have sufficient power in identifying firms that are likely to survive and that the ratings are more informative than financial statement information.