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Impaired Bank Health and Default Risk

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  • Shin-ichi Fukuda

    (Faculty of Economics, University of Tokyo)

  • Munehisa Kasuya

    (Research and Statistics Department, Bank of Japan)

  • Kentaro Akashi

    (Graduate School of Economics, University of Tokyo)

Abstract

Empirical studies in corporate finance have long been focused on the role of banks in reducing the costs of financial distress. The environment and events in Japan provide a "natural experiment" that allows such empirical studies. The number of bankruptcies steadily increased throughout the 1990s, and peaked in 2000. During this period, Japan's banking sector, in contrast, faced considerable problems regarding the disposal of their bad loans. The purpose of this paper is to investigate how various measures of bank health and how defaults of major trading partners affected the probability of bankruptcy among medium-size firms in Japan. Using probit models, we examine the causes of bankruptcy for unlisted Japanese companies in the late 1990s and early 2000s. We find that several measures of bank-specific financial health have had significant impacts on a borrower's probability of bankruptcy, even when observable characteristics relating to these borrower's financial variables are controlled. In particular, a close bank-firm relationship-which usually reduces the probability of bankruptcy-exacerbates the impacts of a financial crisis, which substantially damages other bank health measures as well.

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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-564.

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Length: 32 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:tky:fseres:2008cf564

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References

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Citations

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Cited by:
  1. De Veirman, Emmanuel & Levin, Andrew T., 2012. "When did firms become more different? Time-varying firm-specific volatility in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(4), pages 578-601.
  2. Fukuda, Shin-ichi & Kasuya, Munehisa & Akashi, Kentaro, 2006. "The Role of Trade Credit for Small Firms: An Implication from Japan's Banking Crisis," CEI Working Paper Series 2006-9, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  3. Höwer, Daniel, 2013. "Corporate main bank decision," ZEW Discussion Papers 13-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Shin-ichi Fukuda & Jun-ichi Nakamura, 2010. "Why Did "Zombie" Firms Recover in Japan?," CIRJE F-Series CIRJE-F-751, CIRJE, Faculty of Economics, University of Tokyo.
  5. Shin-ichi Fukuda & Munehisa Kasuya & Kentaro Akashi, 2007. "The Role of Trade Credit for Small Firms : An Implication from Japan’s Banking Crisis," Finance Working Papers 22596, East Asian Bureau of Economic Research.
  6. Guvenir, H. Altay & Cakir, Murat, 2009. "Voting Features based Classifier with Feature Construction and its Application to Predicting Financial Distress," MPRA Paper 21595, University Library of Munich, Germany.
  7. Chen, Peimin & Wu, Chunchi, 2014. "Default prediction with dynamic sectoral and macroeconomic frailties," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 211-226.
  8. Shin-ichi Fukuda & Munehisa Kasuya & Jouchi Nakajima, 2005. "Deteriorating Bank Health and Lending in Japan: Evidence from Unlisted Companies Undergoing Financial Distress (Subsequently published in "Journal of the Asia Pacific Economy" Vo.11, No.4, D," CARF F-Series CARF-F-042, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  9. Haq, Mamiza & Faff, Robert & Seth, Rama & Mohanty, Sunil, 2014. "Disciplinary tools and bank risk exposure," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 37-64.
  10. Harada, Nobuyuki & Kageyama, Noriyuki, 2011. "Bankruptcy dynamics in Japan," Japan and the World Economy, Elsevier, vol. 23(2), pages 119-128, March.
  11. Miyajima, Hideaki & Yafeh, Yishay, 2007. "Japan's banking crisis: An event-study perspective," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2866-2885, September.
  12. Abildgren, Kim & Vølund Buchholst, Birgitte & Staghøj, Jonas, 2013. "Bank-firm relationships and the survival of non-financial firms during the financial crisis 2008-2009," Working Paper Series 1516, European Central Bank.

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