IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/89087.html

The Interaction Effect in a Nonlinear Specification of Bank Lending: A Reexamination of ``Unnatural Selection"

Author

Listed:
  • Inoue, Hitoshi
  • Nakashima, Kiyotaka
  • Takahashi, Koji

Abstract

Peek and Rosengren (2005) suggested the mechanism of ``unnatural selection,'' where Japanese banks with impaired capital increase credit to low-quality firms because of their motivation to pursue balance sheet cosmetics. In this study, we reexamine this mechanism in terms of the interaction effect in a nonlinear specification of bank lending, using data from 1994 to 1999. We rigorously demonstrate that their estimation results imply that Japanese banks allocated lending from viable firms to unviable ones regardless of the degree of bank capitalization.

Suggested Citation

  • Inoue, Hitoshi & Nakashima, Kiyotaka & Takahashi, Koji, 2018. "The Interaction Effect in a Nonlinear Specification of Bank Lending: A Reexamination of ``Unnatural Selection"," MPRA Paper 89087, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89087
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/89087/1/MPRA_paper_89087.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Yoshiaki OGURA & Ryo OKUI & Yukiko SAITO, 2015. "Network-motivated Lending Decisions," Discussion papers 15057, Research Institute of Economy, Trade and Industry (RIETI).
    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 1943-1977, December.
    4. William D. Berry & Jacqueline H. R. DeMeritt & Justin Esarey, 2010. "Testing for Interaction in Binary Logit and Probit Models: Is a Product Term Essential?," American Journal of Political Science, John Wiley & Sons, vol. 54(1), pages 248-266, January.
    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. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    7. Max Bruche & Gerard Llobet, 2014. "Preventing Zombie Lending," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 923-956.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Inoue, Hitoshi & Nakashima, Kiyotaka & Takahashi, Koji, 2016. "Comment on Peek and Rosengren (2005) “Unnatural Selection: Perverse Incentives and the Allocation of Credit in Japan”," MPRA Paper 72726, University Library of Munich, Germany.
    2. Nakashima, Kiyotaka & Takahashi, Koji, 2020. "The time has come for banks to say goodbye: New evidence on bank roles and duration effects in relationship terminations," Journal of Banking & Finance, Elsevier, vol. 115(C).
    3. Inoue, Hitoshi & Nakashima, Kiyotaka & Takahashi, Koji, 2018. "The Emergence of A Parallel World: The Misperception Problem for Bank Balance Sheet Risk and Lending Behavior," MPRA Paper 89088, University Library of Munich, Germany.
    4. Ogura, Yoshiaki & Okui, Ryo & Saito, Yukiko Umeno, 2015. "Network-Motivated Lending Decisions," HIT-REFINED Working Paper Series 29, Institute of Economic Research, Hitotsubashi University.
    5. Salleo, Carmelo & Homar, Timotej & Kick, Heinrich, 2015. "What drives forbearance - evidence from the ECB Comprehensive Assessment," Working Paper Series 1860, European Central Bank.
    6. Suarez, Javier & Sánchez Serrano, Antonio, 2018. "Approaching non-performing loans from a macroprudential angle," Report of the Advisory Scientific Committee 7, European Systemic Risk Board.
    7. Cheung, Jeff Kin Wai & Imai, Masami, 2024. "Zombie lending, labor hoarding, and local industry growth," Japan and the World Economy, Elsevier, vol. 71(C).
    8. Piotr Ciżkowicz & Andrzej Rzońca & Andrzej Torój, 2019. "In Search of an Appropriate Lower Bound. The Zero Lower Bound vs. the Positive Lower Bound under Discretion and Commitment," German Economic Review, Verein für Socialpolitik, vol. 20(4), pages 1028-1053, November.
    9. Imai, Masami, 2019. "Regulatory responses to banking crisis: Lessons from Japan," Global Finance Journal, Elsevier, vol. 39(C), pages 10-16.
    10. 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.
    11. Viral V. Acharya & Matteo Crosignani & Tim Eisert & Christian Eufinger, 2024. "Zombie Credit and (Dis‐)Inflation: Evidence from Europe," Journal of Finance, American Finance Association, vol. 79(3), pages 1883-1929, June.
    12. 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.
    13. Frederico A. Mourad & Rafael F. Schiozer & Toni R. E. dos Santos, 2020. "Bank Loan Forbearance: evidence from a million restructured loans," Working Papers Series 541, Central Bank of Brazil, Research Department.
    14. Shangming Yang & Yanjiang Zhang & Jinyuan Zhang & Bochao Zhang, 2024. "Technology accessibility and the local government's incentive to aid zombie firms in China," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 32(2), pages 501-523, April.
    15. Jiménez, Gabriel & Ongena, Steven & Peydró, José-Luis & Saurina, Jesús, 2010. "Credit supply - Identifying balance-sheet channels with loan applications and granted loans," Working Paper Series 1179, European Central Bank.
    16. Ivana Blažková & Ondřej Dvouletý, 2022. "Zombies: Who are they and how do firms become zombies?," Journal of Small Business Management, Taylor & Francis Journals, vol. 60(1), pages 119-145, January.
    17. Satoshi Koibuchi, 2012. "Debt Forgiveness during Japan’s Lost Decade," Chapters, in: James R. Barth & Chen Lin & Clas Wihlborg (ed.), Research Handbook on International Banking and Governance, chapter 32, Edward Elgar Publishing.
    18. Kaehny, Maximilian & Herweg, Fabian, 2022. "Do Zombies Rise When Interest Rates Fall? A Relationship-Banking Model," VfS Annual Conference 2022 (Basel): Big Data in Economics 264126, Verein für Socialpolitik / German Economic Association.
    19. Christian Keuschnigg & Michael Kogler, 2022. "Trade and credit reallocation: How banks help shape comparative advantage," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 282-305, February.
    20. Shin-ichi Fukuda & Satoshi Koibuchi, 2006. "The Impacts of "Shock Therapy" on Large and Small Clients:Experiences from Two Large Bank Failures in Japan (Forthcoming in "Pacific-Basin Finance Journal". )," CARF F-Series CARF-F-077, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:89087. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.