CIRJE-F-564. Fukuda, Shin-ichi, Munehisa Kasuya
and Kentaro Akashi, "Impaired Bank Health and Default Risk",
May 2008.
Empirical
studies in corporate finance have long been focused on the role of banks in reducing
the costs of financial distress. The environment and events in Japan provide a
"natural experiment" that allows such empirical studies. The number
of bankruptcies steadily increased throughout the 1990s, and peaked in 2000.
During this period, Japan's
banking sector, in contrast, faced considerable problems regarding the disposal
of their bad loans. The purpose of this paper is to investigate how various
measures of bank health and how defaults of major trading partners affected the
probability of bankruptcy among medium-size firms in Japan. Using probit
models, we examine the causes of bankruptcy for unlisted Japanese companies in
the late 1990s and early 2000s. We find that several measures of bank-specific
financial health have had significant impacts on a borrower's probability of
bankruptcy, even when observable characteristics relating to these borrower's
financial variables are controlled. In particular, a close bank-firm
relationship-which usually reduces the probability of bankruptcy-exacerbates
the impacts of a financial crisis, which substantially damages other bank
health measures as well.