Fluctuations in the supply of credit and its effects on the capital structure of Japanese firms

Abstract

This study examines how fluctuations in the supply of credit and financial constraints affect capital structure. It is one of the first studies to do so and its methodology is inspired by the recent studies of Faulkender & Petersen (2006) and Bougheas et al. (2006). It examines the economy of Japan, a perfect testing ground for this theory due to the extreme credit supply fluctuations that have occurred during the past years. Furthermore under this new perspective of capital structure theory two more hypotheses are tested. A “horse race” test between the two predominant theories of capital structure, the trade-off and the pecking order hypothesis, is run. The methodology utilised to perform this test is similar to that derived by Shyam-Sunder & Myers (1999). Finally the role of trade credit, a factor overlooked by the majority of previous capital structure studies, is investigated through the use of a similar methodology as that utilised by Mateut et al. (2006). The results of this panel data study, applied in a large sample of public and private firms, clearly indicate that fluctuations in the supply of credit affect capital structure and also that Japanese firms face financial constraints. The pecking order hypothesis is proven to be the winner of the “horse race” test and trade credit is found to be a significant factor of capital structure and more specifically a substitute to bank credit. These findings should be taken into consideration by future research and even perhaps lead into the creation of a new theory of capital structure

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