Lending to Unhealthy Firms in Japan During the Lost Decade: Distinguishing between Technical and Financial Health

Chakraborty, Suparna; Peek, Joe

We investigate the misallocation of credit in Japan associated with banks’ evergreening loans, distinguishing between two types of firm distress: (perhaps temporary) financial distress and technical distress, which reflects weak operational capabilities, as indicated by low total factor productivity. We show that previous evidence related to firms’ financial health is problematic due to the mixing of loan‐demand and loan‐supply effects. Using a direct measure of operational health, we provide unambiguous, direct evidence of evergreening behavior, as well as confirming evidence based on the relative impacts on subsequent firm viability of loans by bank types with different incentives to evergreen loans.

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More About This Work

Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Center on Japanese Economy and Business Working Papers, 357
Published Here
February 10, 2017