CIRJE-J-46. Tomiyama, Masayo, Kyoji Fukao, Qing-yuan Sui, and Kiyohiko G. Nishimura, "Banks' Monitoring and Profitability of Borrowing Firms", February 2001.

We constructed measures representing the magnitude of Japanese banks' monitoring activities and tested two competing hypotheses about nature of banks' monitoring, (1) the monitoring improved profitability of borrowing firms and (2) it simply "screened" out unprofitable firms, by using the data of all Japanese corporations listed in the Tokyo Stock Exchange between 1986 and 1997. The result was inconsistent with the profitability-improving hypothesis of banks' active involvement in borrowing firms, and strongly suggested the banks' passive role as a screening device.