The Effect of Debt Market Imperfection on Capital Structure and Investment: Evidence from the 2008 Global Financial Crisis in Japan

This paper investigates how debt market frictions affect real firm behaviors such as capital structures and investments differently based on whether a firm has access to the public debt market, taking debt structure differences into account. To this aim, using the natural experimental approach to examine the 2008 credit supply shock in Japan, we show that firms without access to the public debt market face decreased leverage and investment, accompanied by decreased bank debt, compared to firms with access. Considering that firms without access to the public debt market are more dependent on banks for their debt and are likely to have closer relationships with banks than those with access, it is intriguing that bank-dependent firms face reduced debt supplies from banks compared to other firms. Moreover, through investigation of the regression of investments where the interaction term with different debt structures is introduced, it is suggested that differences in debt structure or debt maturity between firms with access to public debt and those without access also play an important role in determining debt and investment and that bank-dependent firms faced more underinvestment or uncertainty after the financial crisis of 2008 than firms with access to the public debt market.