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The Role of Banks in Reducing the Costs of Financial Distress in Japan

41 Pages Posted: 7 Jan 2008  

Takeo Hoshi

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)

Date Written: September 1990

Abstract

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.

Suggested Citation

Hoshi, Takeo and Kashyap, Anil K. and Scharfstein, David S., The Role of Banks in Reducing the Costs of Financial Distress in Japan (September 1990). NBER Working Paper No. w3435. Available at SSRN: https://ssrn.com/abstract=471477

Takeo Hoshi (Contact Author)

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Anil K. Kashyap

University of Chicago, Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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David S. Scharfstein

Harvard Business School - Finance Unit ( email )

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HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

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