The effect of bank recapitalization policy on credit allocation, investment, and productivity: Evidence from a banking crisis in Japan

Hiroyuki Kasahara, Yasuyuki Sawada and Michio Suzuki

Journal of Banking & Finance, 2024, vol. 158, issue C

Abstract: This paper examines the ramifications of government capital injections into financially distressed banks during the 1997 Japanese banking crisis. Using a dataset merging firm-level financial statements and bank balance sheets, we explore whether the capital injections primarily benefited high-productivity firms or were misallocated to struggling “zombie” firms. The results suggest that post-injection banks increased lending to high-productivity non-zombie and low-productivity zombie firms. The former aligns with conventional theories prioritizing high-productivity firms for investment and productivity enhancement; the latter suggests credit misallocation toward struggling firms mainly for debt servicing. There is no evidence that these injections promoted investments among firms. The results indicate that zombie firms reduced investments, particularly in infrastructure. High-productivity non-zombie firms did not exhibit a significant investment boost despite receiving more loans but displayed positive labor and total factor productivity growth, potentially driven by sales growth and increased advertisement expenses rather than employment and wage adjustments.

Keywords: Capital injection; Bank regulation; Banking crisis; Total factor productivity; Zombie firms (search for similar items in EconPapers)
JEL-codes: E22 G21 G28 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Effect of Bank Recapitalization Policy on Credit Allocation, Investment, and Productivity: Evidence from a Banking Crisis in Japan (2023)
Working Paper: The Effect of Bank Recapitalization Policy on Credit Allocation, Investment, and Productivity: Evidence from a Banking Crisis in Japan (2023)
Working Paper: The Effect of Bank Recapitalization Policy on Credit Allocation, Investment, and Productivity: Evidence from a Banking Crisis in Japan (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:158:y:2024:i:c:s0378426623002303

DOI: 10.1016/j.jbankfin.2023.107047

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