Credit distortions in Japanese momentum

Sharon Y. Ross

Journal of Empirical Finance, 2025, vol. 82, issue C

Abstract: Persistent credit distortions have warped equity returns in Japan, where decades of subsidized bank credit to “zombie firms” suppressed momentum premiums. Controlling for zombies revives Japan’s momentum effect: momentum earns significant alpha after adjusting for zombies, and momentum’s expected return and Sharpe ratio triple. The zombie-adjusted factor commands a positive price of risk, becomes unspanned by other factors, and aligns more closely with international patterns. Why? Zombies depend on forbearance from their banks, and zombie losers’ outsized betas to bank returns depress momentum. Analysis of syndicated loan data confirms that firms with forbearance-prone lenders drive Japan’s persistently low momentum returns.

Keywords: Zombies; Momentum; Credit distortion; Forbearance (search for similar items in EconPapers)
JEL-codes: G10 G12 G20 G28 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:82:y:2025:i:c:s0927539825000374

DOI: 10.1016/j.jempfin.2025.101615

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