|SATO Toyohiko (Tokyo Metropolitan Small Business Center) / XU Peng (Hosei University)
|December 2010 10-J-056
|Study Group on Changes in Financial and Industrial Structures
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In this paper, we examine how and what types of Japanese small and medium-sized enterprises (SMEs) use the private placement market, exploring factors behind their choice between private placement bonds and bank loans as a means of raising capital. Privately placed corporate bonds tend to have a medium- to long-term maturity period and are often guaranteed by banks. The typical profile of an issuer of privately placed bonds is a medium-sized firm that is fairly profitable and has relatively low financial leverage. Meanwhile, poorly performing medium-sized enterprises - i.e., those posing a serious information asymmetry problem - and smaller firms tend to opt for bank loans. As compared to issuers of private placement bonds, firms relying on long-term bank loans generally have a higher fixed-to-total assets ratio. That is, smaller firms and information-problematic medium-sized firms tend to borrow from banks. We argue that issuing private placement bonds offers greater advantages to those firms capable of doing so, namely, profitable and medium sized firms with relatively low financial leverage because it enables them to secure medium- to long-term financing and thus avoid frequent bank interference with their business management. Furthermore, they can build a track record of successful bond issuance. These findings have important policy implications regarding SMEs' choice of financing. Meanwhile, firms show less of a tendency to issue bonds when their main creditor bank is saddled with more bad loans. This suggests that the credit crunch is not a reason for opting for private placement bonds.