The Effect of Bank Recapitalization Policy on Corporate Investment: Evidence from a Banking Crisis in Japan

Hiroyuki Kasahara, Yasuyuki Sawada and Michio Suzuki
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Yasuyuki Sawada: University of Tokyo

No CARF-F-399, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This article examines the effect of government capital injections into financially troubled banks on corporate investment during the Japanese banking crisis of the late 1990s. By helping banks meet the capital requirements imposed by Japanese banking regulation, recapitalization enables banks to respond to loan demands, which could help firms increase their investment. To test this mechanism empirically, we combine the balance sheet data of Japanese manufacturing firms with bank balance sheet data and estimate a linear investment model where the investment rate is a function of not only firm productivity and size but also bank regulatory capital ratios. We find that the coefficient of the interaction between a firm's total factor productivity measure and a bank's capital ratio is positive and significant, implying that the bank's capital ratio affects more productive firms. Counterfactual policy experiments suggest that capital injections made in March 1998 and 1999 had a negligible impact on the average investment rate, although there was a reallocation effect, shifting investments from low- to high-productivity firms.

Pages: 39 pages
Date: 2016-11
New Economics Papers: this item is included in nep-ban, nep-cba and nep-eff
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https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/F399.pdf (application/pdf)

Related works:
Working Paper: The Effect of Bank Recapitalization Policy on Corporate Investment: Evidence from a Banking Crisis in Japan (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf399

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