THE COST OF BORROWED FUNDS BY FIRM SCALE IN JAPAN: AN EMPIRICAL INVESTIGATION

Abstract

Much academic discussion and public policy has been directed toward the issue of the cost of borrowed funds by firm scale in Japan. The traditional wisdom has been that the cost of such funds is much greater for small firms than for large. In this paper, I account for the impact of compensating balances in calculating effective interest rates paid by firms of different size. I find that the process determining interest rates for the two sizes of firms does differ, but that there has been much convergence recently. Possible explanations for this convergence are explored in the paper.