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

Hiroyuki Kasahara (), Yasuyuki Sawada () and Michio Suzuki

No DP18-2, RCESR Discussion Paper Series from Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University

Abstract: This article examines the effect of government capital injections into nancially 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 firrms 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.

Keywords: Capital injection; Bank regulation; Banking crisis (search for similar items in EconPapers)
JEL-codes: E22 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-cfn and nep-mac
Date: 2018-03
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Working Paper: The Effect of Bank Recapitalization Policy on Corporate Investment: Evidence from a Banking Crisis in Japan (2016) Downloads
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