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Why Did "Zombie" Firms Recover in Japan?

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  • Shin-ichi Fukuda

    (Faculty of Economics, University of Tokyo)

  • Jun-ichi Nakamura

    (Development Bank of Japan)

Abstract

The Japanese economy experienced prolonged recessions during the 1990s. Previous studies suggest that evergreen lending to troubled firms known as "zombie firms" distorted market discipline in terms of stabilizing the Japanese economy and caused significant delays in the economy's recovery. However, the eventual bankruptcy of zombies was rare. In fact, a majority of the "zombie" firms substantially recovered during the first half of the 2000s. The purpose of this paper is to investigate why zombie firms recovered in Japan. We first extend the method of Caballero, Hoshi, and Kashyap (2008) and identify zombies from among the listed firms. Subsequently, we investigate the nature of corporate restructuring that was effective in reviving zombie firms. Our multinomial logistic regressions suggest that reducing the employee strength of zombie firms and selling its fixed assets were beneficial in facilitating their recovery. However, corporate restructuring without accounting transparency or by discouraging incentives for managers was ineffective. In addition, corporate restructuring lacked effectiveness in the absence of favorable macroeconomic environment as well as substantial external financial support.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-751.

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Length: 38pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:tky:fseres:2010cf751

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  1. Shin-ichi Fukuda & Munehisa Kasuya & Kentaro Akashi, 2008. "Impaired Bank Health and Default Risk," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-564, CIRJE, Faculty of Economics, University of Tokyo.
  2. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 9(1), pages 7-25, January.
  3. Hanazaki, Masaharu & Horiuchi, Akiyoshi, 2003. "A review of Japan's bank crisis from the governance perspective," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 11(3), pages 305-325, July.
  4. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  5. Fukuda, Shin-ichi & Koibuchi, Satoshi, 2006. "The Impacts of "Shock Therapy" on Large and Small Clients: Experiences from Two Large Bank Failures in Japan," CEI Working Paper Series, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University 2006-8, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  6. Berglof Erik & Roland Gerard, 1995. "Bank Restructuring and Soft Budget Constraints in Financial Transition," Journal of the Japanese and International Economies, Elsevier, vol. 9(4), pages 354-375, December.
  7. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
  8. Hoshi, Takeo & Kashyap, Anil K., 1990. "Evidence on q and investment for Japanese firms," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 371-400, December.
  9. Shin-Ichi Fukuda & Satoshi Koibuchi, 2006. "The Impacts Of "Shock Therapy" Under A Banking Crisis: Experiences From Three Large Bank Failures In Japan," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 57(2), pages 232-256.
  10. Alan Ahearne & Naoki Shinada, 2005. "Zombie firms and economic stagnation in Japan," International Economics and Economic Policy, Springer, vol. 2(4), pages 363-381, December.
  11. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2006. "Zombie Lending and Depressed Restructuring in Japan," NBER Working Papers 12129, National Bureau of Economic Research, Inc.
  12. Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August.
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Cited by:
  1. Emmanuel De Veirman & Andrew T. Levin, 2012. "When Did Firms Become More Different? Time-Varying Firm-Specific Volatility in Japan," CAMA Working Papers 2012-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Kaoru Hosono & Miho Takizawa, 2012. "Do Financial Frictions Matter as a Source of Misallocation? Evidence from Japan," Discussion papers, Policy Research Institute, Ministry of Finance Japan ron246, Policy Research Institute, Ministry of Finance Japan.
  3. Uchida, Hirofumi & Miyakawa, Daisuke & Hosono, Kaoru & Ono, Arito & Uchino, Taisuke & Uesugi, Iichiro, 2013. "Natural Disaster and Natural Selection," Working Paper Series 25, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.
  4. Kentaro Imai, 2013. "A Panel Study of Zombie SMEs in Japan: Identification, Borrowing and Investment Behavior," Discussion Papers in Economics and Business 13-16-Rev., Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Sep 2014.

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