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The effect of bank recapitalization policy on credit allocation, investment, and productivity: Evidence from a banking crisis in Japan

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  • Kasahara, Hiroyuki
  • Sawada, Yasuyuki
  • Suzuki, Michio

Abstract

This paper examines the ramifications of government capital injections into financially distressed banks during the 1997 Japanese banking crisis. Using a dataset merging firm-level financial statements and bank balance sheets, we explore whether the capital injections primarily benefited high-productivity firms or were misallocated to struggling “zombie” firms. The results suggest that post-injection banks increased lending to high-productivity non-zombie and low-productivity zombie firms. The former aligns with conventional theories prioritizing high-productivity firms for investment and productivity enhancement; the latter suggests credit misallocation toward struggling firms mainly for debt servicing. There is no evidence that these injections promoted investments among firms. The results indicate that zombie firms reduced investments, particularly in infrastructure. High-productivity non-zombie firms did not exhibit a significant investment boost despite receiving more loans but displayed positive labor and total factor productivity growth, potentially driven by sales growth and increased advertisement expenses rather than employment and wage adjustments.

Suggested Citation

  • Kasahara, Hiroyuki & Sawada, Yasuyuki & Suzuki, Michio, 2024. "The effect of bank recapitalization policy on credit allocation, investment, and productivity: Evidence from a banking crisis in Japan," Journal of Banking & Finance, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:jbfina:v:158:y:2024:i:c:s0378426623002303
    DOI: 10.1016/j.jbankfin.2023.107047
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    More about this item

    Keywords

    Capital injection; Bank regulation; Banking crisis; Total factor productivity; Zombie firms;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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