Do Bank Loans to Financially Distressed Firms Lead to Innovation?

13 Pages Posted: 5 May 2017

See all articles by Minjung Kim

Minjung Kim

Sogang University

Jungsoo Park

Sogang University

Date Written: June 2017


This study scrutinizes the association between a bank loan to a financially distressed firm and technological innovation. Using probit model estimations based on a comprehensive Korean manufacturing firm‐level data set on innovation and bank loans, we first find that a bank loan to a troubled firm with a weak incentive system has no or little effect on innovation. Second, beneficial effects on innovation are observed when the firm has a strong incentive‐based pay system. Third, financially distressed firms with strong incentive systems pursue product innovation rather than process innovation. Finally, the innovation performance of these firms strengthens with more stable financing.

Suggested Citation

Kim, Minjung and Park, Jungsoo, Do Bank Loans to Financially Distressed Firms Lead to Innovation? (June 2017). The Japanese Economic Review, Vol. 68, Issue 2, pp. 244-256, 2017. Available at SSRN: or

Minjung Kim

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)

Jungsoo Park (Contact Author)

Sogang University ( email )

35 Baekbeom-ro
Seoul, 121-742


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