The Role of Banks in Reducing the Costs of Financial Distress in Japan
University of California at San Diego; National Bureau of Economic Research (NBER)
Anil K. Kashyap
University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago
David S. Scharfstein
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
NBER Working Paper No. w3435
This paper explores the idea that financial distress is costly because free-rider problems and information asymmetries make it difficult for firms to renegotiate with their creditors in times of distress. We present evidence consistent with this view by showing Japanese firms with financial structures in which free-rider and information problems are likely to be small perform better than other firms in industrial groups-those with close financial relationships to their banks, suppliers, and customers-invest more and sell more after the onset of distress than non-qroup firms. Moreover, firms that are not group members, but nevertheless have strong ties to a main bank also invest and sell more than firms without strong bank ties.
Number of Pages in PDF File: 41
Date posted: January 7, 2008
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