No abstract

Empirical studies in corporate finance have long been focused on the role of banks in reducing the costs of financial distress. The environment and events in Japan provide a "natural experiment" that allows such empirical studies. The number of bankruptcies steadily increased throughout the 1990s, and peaked in 2000. During this period, Japan's banking sector, in contrast, faced considerable problems regarding the disposal of their bad loans. The purpose of this paper is to investigate how various measures of bank health and how defaults of major trading partners affected the probability of bankruptcy among medium-size firms in Japan. Using probit models, we examine the causes of bankruptcy for unlisted Japanese companies in the late 1990s and early 2000s. We find that several measures of bank-specific financial health have had significant impacts on a borrower's probability of bankruptcy, even when observable characteristics relating to these borrower's financial variables are controlled. In particular, a close bank-firm relationship-which usually reduces the probability of bankruptcy-exacerbates the impacts of a financial crisis, which substantially damages other bank health measures as well.

When a borrower faces a hold-up problem, deteriorating bank health might reduce a borrower's credit availability. However, a bank with an impaired balance-sheet might attempt to 'gamble for resurrection' and hence might increase risky lending to zombie firms. The purpose of this paper is to investigate what impacts weakened financial conditions of banks had on loans outstanding to medium size firms in Japan. Estimating lending functions, we examine the determinants of lending to unlisted Japanese companies in the late 1990s and the early 2000s. We find that two alternative measures of the bank health, regulatory capital adequacy ratios and ratios of non-performing loans (NPLs), had opposite impacts on lending. In the case of regulatory capital adequacy ratios, its deterioration had a perverse impact on the bank's lending. The deteriorating NPL ratios, however, increased lending to troubled firms to keep otherwise economically bankrupt firms alive.

The purpose of this paper is to examine the effects of corporate governance on the performance of Japanese unlisted companies from 1997 to 2002, when the problem of non-performing loans became serious. Using data of unlisted companies, we examine to what extent the ownership structure has a significant impact on firm's performance. When estimating the determinants of Tobin's q, we find that the ownership structure has a significant influence on the performance of each unlisted company. However, the impact was totally different between companies with good performance and bad performance. In particular, the increase in the shareholding ratio of a specific individual or a parent company worked positively for companies with good performance, but it worked negatively for companies with poor performance. The results suggest that the distorted governance structure in unlisted companies, which had worked well during the bubble economy, may have significantly restricted their recovery under prolonged recession in Japan.

Even though monetary policy has kept interest rates at historically low levels, the Japanese economy has experienced long lasting recessions since the 1990s. In this paper, Japanese data are employed to conduct an empirical analysis of changes in the effects of monetary policy on the real economy. It is found that monetary policy effects vary depending on the phase of the business cycle and the lending attitudes diffusion indices. More precisely, policy effects are larger in recession but diminish in extreme recession, and monetary policy is more effective when lenders' attitudes are severe but less effective when they are excessively severe.