Zombies on the Brink: Evidence from Japan on the Reversal of Monetary Policy Effectiveness

42 Pages Posted: 25 May 2021

See all articles by Deniz Igan

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division

Gee Hee Hong

International Monetary Fund (IMF)

Do Q Lee

New York University

Date Written: February 2021

Abstract

How does unconventional monetary policy affect corporate capital structure and investment decisions? We study the transmission channel of quantitative easing and its potential diminishing returns on investment from a corporate finance perspective. Using a rich bank-firm matched data of Japanese firms with information on corporate debt and investment, we study how firms adjust their capital structure in response to the changes in term premia. Investment responds positively to a reduction in the term premium on average. However, there is a significant degree of cross-sectional variation in firm response: healthier firms increase capital spending and cash holdings, while financially vulnerable firms take advantage of lower long-term yields to refinance without increasing investment.

JEL Classification: E20, E50, G30, E52, E42, H83, E43, H63

Suggested Citation

Igan, Deniz and Hong, Gee Hee and Lee, Do Q, Zombies on the Brink: Evidence from Japan on the Reversal of Monetary Policy Effectiveness (February 2021). IMF Working Paper No. 2021/044, Available at SSRN: https://ssrn.com/abstract=3852772

Deniz Igan (Contact Author)

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Gee Hee Hong

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Do Q Lee

New York University ( email )

19 West 4th Street
6 Floor
New York, NY New York 10012
United States
(312) 428-0188 (Phone)

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