Bank Distress and Productivity of Borrowing Firms: Evidence from Japan

We investigate the effects of bank distress on the productivity of borrowing firms by using data on listed companies in the Japanese manufacturing industry during the 1990s. We find some evidence suggesting that deterioration in the financial health of banks, such as a decline in the capital-asset ratio, decreased the productivity of their borrowers during the period of the severe financial crisis (FY1997—1999). Although large nonperforming loans had posed a serious problem in the Japanese economy since the collapse of the asset prices bubble in 1991, the resolution of the problem was postponed during the early 1990s. The Japanese economy plunged into a serious banking crisis from 1997 to 1999. Our finding empirically confirms the common view that a banking crisis negatively affects the productivity of the corporate sector.