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Why Did ?Zombie? Firms Recover in Japan?

  • Shin-ichi Fukuda

    (Faculty of Economics, University of Tokyo)

  • Jun-ichi Nakamura

    (Development Bank of Japan)

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 Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-224.

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Length: 38 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:cfi:fseres:cf224
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  1. Hanazaki, Masaharu & Horiuchi, Akiyoshi, 2003. "A review of Japan's bank crisis from the governance perspective," Pacific-Basin Finance Journal, Elsevier, vol. 11(3), pages 305-325, July.
  2. 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.
  3. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-77, December.
  4. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
  5. 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, vol. 21(2), pages 69-92, August.
  6. 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 2006-8, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  7. 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.
  8. Shin-ichi Fukuda & Satoshi Koibuchi, 2005. "The Impacts of "Shock Therapy" under a Banking Crisis : Experiences from Three Large Bank Failures in Japan," CIRJE F-Series CIRJE-F-351, CIRJE, Faculty of Economics, University of Tokyo.
  9. Berglöf, Erik & Roland, Gérard, 1995. "Bank Restructuring and Soft Budget Constraints in Financial Transition," CEPR Discussion Papers 1250, C.E.P.R. Discussion Papers.
  10. Shin-ichi Fukuda & Munehisa Kasuya & Kentaro Akashi, 2008. "Impaired Bank Health and Default Risk," CIRJE F-Series CIRJE-F-564, CIRJE, Faculty of Economics, University of Tokyo.
  11. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
  12. 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.
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