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

56 Pages Posted: 6 Jun 2019

See all articles by Hiroyuki Kasahara

Hiroyuki Kasahara

University of British Columbia, Vancouver School of Economics

Yasuyuki Sawada

University of Tokyo; Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD)

Michio Suzuki

Tohoku University

Date Written: May 14, 2019

Abstract

This study examines the effect of government capital injections into financially troubled banks on corporate investment during the Japanese banking crisis of the late 1990s. By helping them to meet the capital requirements imposed by Japanese banking regulation, recapitalization enables banks to respond to loan demands. This, in turn, helps firms to increase their investment, especially for high-productivity firms, for which the return from investment is high. To test this mechanism empirically, combining the balance sheet data of Japanese manufacturing firms with that of banks, we examine how the impact of bank regulatory capital ratios and capital injections on bank loans and firm's investments vary across firms, depending on their total factor productivity (TFP) and financial health status. We find that the estimated interaction of a firm's TFP with a bank's capital ratio or capital injection is positive and significant, implying that the effect of capital injections on bank loans and investments is larger for high-productive firms than it is for low-productive firms. Counterfactual policy experiments suggest that capital injections made in March of 1998 and 1999 had a substantial reallocation effect, shifting investments from low- to high-productivity firms.

Keywords: Capital injection, Bank regulation, Banking crisis, Total Factor Productivity, Zombie

JEL Classification: E22, G21, G28

Suggested Citation

Kasahara, Hiroyuki and Sawada, Yasuyuki and Suzuki, Michio, The Effect of Bank Recapitalization Policy on Corporate Investment: Evidence from a Banking Crisis in Japan (May 14, 2019). Available at SSRN: https://ssrn.com/abstract=3389889 or http://dx.doi.org/10.2139/ssrn.3389889

Hiroyuki Kasahara (Contact Author)

University of British Columbia, Vancouver School of Economics ( email )

6000 Iona Dr.
Vancouver, British Columbia BC V6T 1L4
Canada

HOME PAGE: http://https://faculty.arts.ubc.ca/hkasahara/

Yasuyuki Sawada

University of Tokyo ( email )

Yayoi 1-1-1
Bunkyo-ku
Tokyo, Tokyo 113-8657
Japan

Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD) ( email )

Philippines

Michio Suzuki

Tohoku University ( email )

Kawauchi, Aoba-ku
Sendai, 980-8576
Japan

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