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Corporate Debt Restructuring and Public Financial Institutions in Japan -Do Government-Affiliated Financial Institutions Soften Budget Constraints?-

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Author Info
Kenya Fujiwara (Kobe University)
Abstract

There are two different views on the effects of public financial institutions on corporate debt restructuring: the soft budget view and the hard budget view. The former view, which is held by Kornai (1979, 1983), Dewatripont and Maskin (1995), and others insists that because centralized public financial institutions have difficulty committing themselves to refrain from providing additional funds to distressed firms, corporate reorganizations often result in overinvestment. On the other hand, the latter view argues that public financial institutions should prefer corporate liquidation rather than the continuation of business because public financial institutions are secured by mortgages to a greater extent and are more reluctant to forgive the debts than private financial institutions.

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File URL: http://www.eaber.org/intranet/documents/23/672/MOF_Fujiwara_06.pdf
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Publisher Info
Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 672.

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Length: 36 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:eab:financ:672

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Related research
Keywords: public financial institutions; debt restructuring; soft budget view; hard budget view; Kornai; Dewatripont; Maskin; corporate reorganizations; corporate liquidation; private financial institutions; debt;

Find related papers by JEL classification:
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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References listed on IDEAS
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  4. Asquith, Paul & Gertner, Robert & Scharfstein, David, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 625-58, August. [Downloadable!] (restricted)
    Other versions:
  5. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn. [Downloadable!] (restricted)
  6. Dahiya, Sandeep & John, Kose & Puri, Manju & Ramirez, Gabriel, 2003. "Debtor-in-possession financing and bankruptcy resolution: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 69(1), pages 259-280, July. [Downloadable!] (restricted)
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  10. Haizhou Huang & Chenggang Xu, 1999. "Institutions, Innovations, and Growth," American Economic Review, American Economic Association, vol. 89(2), pages 438-443, May. [Downloadable!] (restricted)
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  11. Aghion, Philippe & Hart, Oliver & Moore, John, 1992. "The Economics of Bankruptcy Reform," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(3), pages 523-46, October.
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  12. Li, David D., 1998. "Insider control and the soft budget constraint: a simple theory," Economics Letters, Elsevier, vol. 61(3), pages 307-311, December. [Downloadable!] (restricted)
  13. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November. [Downloadable!] (restricted)
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  15. Eric S. Maskin, 1999. "Recent Theoretical Work on the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 421-425, May. [Downloadable!] (restricted)
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