Firm Age and the Evolution of Borrowing Costs: Evidence from Japanese Small Firms

This paper investigates how a firm's borrowing cost evolves as it ages. Using a new data set of more than 200,000 bank-dependent small firms in 1997-2002, we find the following. First, the distribution of borrowing cost tends to become less skewed to the right over time. Second, this shift of the distribution can be partially attributable to "selection" (i.e., firms with lower quality and higher borrowing costs exit from markets), but mainly explained by "adaptation" (i.e., surviving firms' borrowing costs decline as they age). Third, we find an age dependence of a firm's borrowing costs even if we control for firm size, but fails to find an age dependence of its profits volatility once we control for firm size. Empirical results suggest that age dependence of borrowing costs comes not from the Diamond's reputation-acquisition mechanism, but from bank's learning about borrower's true quality over the duration of bank-borrower relationship.

Published: Koji Sakai, Iichiro Uesugi and Tsutomu Watanabe, 2010. "Firm Age and the Evolution of Borrowing Costs: Evidence from Japanese Small Firms," Journal of Banking and Finance, Vol. 34(8), pp. 1970-1981.
http://www.sciencedirect.com/science/article/pii/S0378426610000105