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Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan

  • Joe Peek
  • Eric S. Rosengren

This study examines the misallocation of credit in Japan associated with the perverse incentives of banks to provide additional credit to the weakest firms. Firms are far more likely to receive additional credit if they are in poor financial condition, and these firms continue to perform poorly after receiving additional bank financing. Troubled Japanese banks allocate credit to severely impaired borrowers primarily to avoid the realization of losses on their own balance sheets. This problem is compounded by extensive corporate affiliations, which provide a further incentive for banks to allocate scarce credit based on considerations other than prudent credit risk analysis.

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File URL: http://www.nber.org/papers/w9643.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9643.

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Date of creation: Apr 2003
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Publication status: published as Peek, Joe and Eric S. Rosengren. "Unnatural Selection: Perverse Incentives And The Misallocation Of Credit In Japan," American Economic Review, 2005, v95(4,Sep), 1144-1166.
Handle: RePEc:nbr:nberwo:9643
Note: CF EFG
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  1. Joe Peek & Eric S. Rosengren, 1996. "The International Transmission of Financial Shocks: The Case of Japan," Boston College Working Papers in Economics 357, Boston College Department of Economics.
  2. Miwa, Yoshiro & Ramseyer, J. Mark, 2006. "The Fable of the Keiretsu," University of Chicago Press Economics Books, University of Chicago Press, edition 0, number 9780226532707.
  3. Eric S. Rosengren & Joe Peek, 2000. "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, American Economic Association, vol. 90(1), pages 30-45, March.
  4. Gibson, Michael S, 1995. "Can Bank Health Affect Investment? Evidence from Japan," The Journal of Business, University of Chicago Press, vol. 68(3), pages 281-308, July.
  5. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1993. "The Choice Between Public and Private Debt: An Analysis of Post-Deregulation Corporate Financing in Japan," NBER Working Papers 4421, National Bureau of Economic Research, Inc.
  6. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  7. Joe Peek & Eric S. Rosengren, 1998. "Determinants of the Japan premium: actions speak louder than words," Working Papers 98-9, Federal Reserve Bank of Boston.
  8. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  9. Kang, Jun-Koo & Shivdasani, Anil, 1997. "Corporate restructuring during performance declines in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 29-65, October.
  10. Michael W. Klein & Eric Rosengren & Joe Peek, 2000. "Troubled banks, impaired foreign direct investment: the role of relative access to credit," Working Papers 00-4, Federal Reserve Bank of Boston.
  11. Randall Morck & Masao Nakamura, 1999. "Banks and Corporate Control in Japan," Journal of Finance, American Finance Association, vol. 54(1), pages 319-339, 02.
  12. Kang, Jun-Koo & Shivdasani, Anil, 1995. "Firm performance, corporate governance, and top executive turnover in Japan," Journal of Financial Economics, Elsevier, vol. 38(1), pages 29-58, May.
  13. Kang, Jun-Koo & Stulz, Rene M, 2000. "Do Banking Shocks Affect Borrowing Firm Performance? An Analysis of the Japanese Experience," The Journal of Business, University of Chicago Press, vol. 73(1), pages 1-23, January.
  14. Weinstein, D.E. & Yafeh, Y., 1993. "Japan's Corporate Groups: Collusive or Competitive? An Empirical Investigation of Keiretsu Behavior," Harvard Institute of Economic Research Working Papers 1623, Harvard - Institute of Economic Research.
  15. Morck, Randall & Nakamura, Masao & Shivdasani, Anil, 2000. "Banks, Ownership Structure, and Firm Value in Japan," The Journal of Business, University of Chicago Press, vol. 73(4), pages 539-67, October.
  16. Yoshiro Miwa & J. Mark Ramseyer, 2001. "The Myth of the Main Bank: Japan and Comparative Corporate Governance," CIRJE F-Series CIRJE-F-131, CIRJE, Faculty of Economics, University of Tokyo.
  17. Montgomery, Heather, 2005. "The effect of the Basel Accord on bank portfolios in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 19(1), pages 24-36, March.
  18. Takeo Hoshi & Anil Kashyap, 2000. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 129-212 National Bureau of Economic Research, Inc.
  19. David E. Weinstein & Yishay Yafeh, 1998. "On the Costs of a Bank-Centered Financial System: Evidence from the Changing Main Bank Relations in Japan," Journal of Finance, American Finance Association, vol. 53(2), pages 635-672, 04.
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