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Why Did ?Zombie? Firms Recover in Japan?

Shin-ichi Fukuda () and Jun-Ichi Nakamura

No CARF-F-224, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: The Japanese economy experienced prolonged recessions during the 1990s. Previous studies suggest that evergreen lending to troubled firms known as ?zombie firms? distorted market discipline in terms of stabilizing the Japanese economy and caused significant delays in the economy?s recovery. However, the eventual bankruptcy of zombies was rare. In fact, a majority of the ?zombie? firms substantially recovered during the first half of the 2000s. The purpose of this paper is to investigate why zombie firms recovered in Japan. We first extend the method of Caballero, Hoshi, and Kashyap (2008) and identify zombies from among the listed firms. Subsequently, we investigate the nature of corporate restructuring that was effective in reviving zombie firms. Our multinomial logistic regressions suggest that reducing the employee strength of zombie firms and selling its fixed assets were beneficial in facilitating their recovery. However, corporate restructuring without accounting transparency or by discouraging incentives for managers was ineffective. In addition, corporate restructuring lacked effectiveness in the absence of favorable macroeconomic environment as well as substantial external financial support.

Pages: 38 pages
Date: 2010-07
New Economics Papers: this item is included in nep-bec
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Related works:
Journal Article: Why Did ‘Zombie’ Firms Recover in Japan? (2011)
Working Paper: Why Did "Zombie" Firms Recover in Japan? (2010) Downloads
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