Corporate Affiliations and the (Mis)Allocation of Credit

46 Pages Posted: 27 Oct 2002

See all articles by Joe Peek

Joe Peek

Federal Reserve Banks - Federal Reserve Bank of Boston

Eric S. Rosengren

Federal Reserve Bank of Boston - Supervision and Regulation

Date Written: August 29, 2002

Abstract

The strong corporate affiliations in Japan have been cited as one of the major impediments to making the fundamental changes necessary to escape the economic malaise that has afflicted the Japanese economy over the past decade. While Japanese corporate affiliations during good economic times were heralded as an effective way to increase credit availability and reduce agency costs, during difficult economic circumstances these same affiliations may impede needed economic restructuring, insofar as they insulate firms from the market discipline that otherwise would be imposed by creditors. This study shows that corporate affiliations have contributed to significant misallocations of credit, since troubled borrowers with strong corporate affiliations with their lenders are more likely to obtain additional credit than their healthier brethren. In contrast, lenders that are not affiliated with the firm are less likely to extend additional credit as firms become more troubled.

Keywords: Corporate Affiliations, Japan, Banking, Credit

JEL Classification: G21, G34, G28

Suggested Citation

Peek, Joe and Rosengren, Eric S., Corporate Affiliations and the (Mis)Allocation of Credit (August 29, 2002). Available at SSRN: https://ssrn.com/abstract=327303 or http://dx.doi.org/10.2139/ssrn.327303

Joe Peek (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Eric S. Rosengren

Federal Reserve Bank of Boston - Supervision and Regulation ( email )

600 Atlantic Avenue
P.O. Box 2076
Boston, MA 02210
United States
617-973-3090 (Phone)
617-973-3219 (Fax)

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