Lending to unhealthy firms in Japan during the lost decade: distinguishing between technical and financial health

Suparna Chakraborty and Joe Peek

No 16-22, Working Papers from Federal Reserve Bank of Boston

Abstract: We investigate the misallocation of credit in Japan associated with banks? evergreening loans, distinguishing between two types of firm distress: (perhaps temporary) financial distress and technical distress, which reflects weak operational capabilities, as indicated by low total factor productivity. We show that previous evidence related to firms? financial health is problematic due to the mixing of loan-demand and loan-supply effects. Using a direct measure of operational health, we provide unambiguous, direct evidence of evergreening behavior, as well as confirming evidence based on the relative impacts on subsequent firm viability of loans by bank types with different incentives to evergreen loans.

Keywords: total factor productivity; bank lending; Japan; zombie firms; financial crisis (search for similar items in EconPapers)
JEL-codes: E44 E51 G21 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2016-12-01
New Economics Papers: this item is included in nep-ban, nep-eff and nep-mac
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