Efficiency of Credit Allocation and Effectiveness of Government Credit Guarantees: Evidence from Japanese Small Businesses

This paper empirically examines the development of credit allocation amongst Japanese small- and medium-sized enterprises (SMEs), and the relationship between credit allocation and economic efficiency. We first investigate whether the credit market is inefficient, in that the survival of underperforming firms force better-performing firms to exit the market. Secondly, we test whether government credit guarantee programs are beneficial. In other words, do these programs increase the funds available to SMEs, and, more importantly, do they significantly impact the profitability of program users? Using a pair of unique firm-level datasets, we come to two major conclusions. (1) The selection mechanism in the Japanese credit market is efficiency-improving in that lower quality firms with higher borrowing costs are more likely to default. (2) The massive credit guarantee program implemented by the Japanese government in the late 1990s did result in the increased availability of funds to SMEs, and to the greater profitability of creditworthy firms. Moreover, interest rates do not decrease among program users indicating that government interest payment subsidies are not attributed fully to borrowers.

Economic Conditions and Japanese Firm Financing

This paper investigates the role played by non-financial firms in Japanese corporate financing. We find that non-financial firms are an important source of credit for both small and large firms in Japan. We also document that adverse real and financial shocks have similar effects on small and large firm financing. The primary implication of our results is that credit from the non-financial private sector in Japan serves to lessen the adverse impact of real and financial shocks on the economy.Business Cycles

Top Executive Turnover in Japanese Non-listed Firms: Causes and Consequences

We examine the pattern of top executive turnover among small non-listed businesses in Japan using a unique panel data set of about 25,000 firms for 2001-2007 and find the following. First, the likelihood of a change in top executive among non-listed firms is independent of their ex-ante performance, especially when the firms are owned by the top executives themselves or by their relatives. Second, non-listed firms which experienced a top executive turnover saw an improvement in ex-post performance relative to firms without turnover. The extent of the improvement is similar between non-listed firms and listed firms. All of the above results indicate that underperforming non-listed firms do not face disciplinary pressure to replace their executive, but that once new top executives are in place, they exert high managerial effort and thus significantly improve their firm's profitability.

Does the Expectation Hypothesis Hold at the Shortest End of the Term Structure?

This paper examines the predictability smile at the shortest end of the term structure. The existence of a predictability smile has been well documented: spreads between long rates and short rates are able to forecast subsequent movements in interest rates well, provided the horizon is three months or less or two years or more. The predictive power of the spread at the shortest maturities, however, has not been adequately investigated. This is a potential shortcoming of the existing literature as a projection of the predictability smile to the shorter maturities is not a guarantee that the expectations hypothesis holds. In Japan, a positive spread between the forward and the spot rates has insufficient predictive power for the future spot rate innovations, while a negative spread has near-perfect predictive ability. Further, we provide evidence that this result is not unique to Japan, as we find this "asymmetric predictability" to be a feature of the very short-term money markets of the U.S., U.K. and Italy.Term Structure, Predictability, Money Market

Firm Age and the Evolution of Borrowing Costs: Evidence from Japanese Small Firms

This paper investigates how a firm's borrowing cost evolves as it ages. Using a new data set of more than 200,000 bank-dependent small firms for 1997-2002, we find the following. First, the distribution of borrowing costs tends to become less skewed to the right over time, which can be partially attributed to "selection" (i.e., exits of defaulting firms reduce the total borrowing costs), but is mainly explained by "adaptation" (i.e., surviving firms' borrowing costs decline as they age). Second, the selection process is natural in that firms with lower quality are separated, charged higher borrowing costs, and eventually forced to exit, which contrasts with the results of previous studies on Japan's credit misallocations, such as Peek and Rosengren (2005). Third, in the adaptation process, we find an age dependence of firms' borrowing costs even if we control for firm size.firm age, borrowing cost, selection, credit allocation, reputation

The Effects of Collateral on Firm Performance

This paper examines how collateral and personal guarantees affect firms’ ex-post performance employing a propensity score matching estimation approach. Based on a unique firm-level panel data set of more than 500 small-and-medium-sized borrower firms in Japan, we find that borrowers that provide collateral to lenders experience larger increases in profitability and reductions in riskiness than borrowers that do not. The main channel through which the borrower enhances its profitability is cost-cutting restructuring. These findings are consistent with the hypothesis that collateral reduces moral hazard by providing borrowers with an incentive to enhance their creditworthiness. We find little evidence that improvements in collateralized firms’ performance are driven by the intensified monitoring on the part of lenders, or by borrowing firms’ access to larger amounts of credit.collateral, moral hazard, propensity score

Measuring Economic Localization: Evidence from Japanese Firm-level Data

This paper examines location patterns of Japan’s manufacturing industries using a unique firm-level dataset on the geographic location of firms. Following the point-pattern approach proposed by Duranton and Overman (2005), we find the following. First, about half of Japan’s manufacturing industries can be classified as localized and the number of localized industries is largest for a distance level of 40 km or less. Second, several industries in the textile mill products sector are among the most localized, which is similar to findings for the UK, suggesting that there exist common factors across countries determining the concentration of industrial activities. Third, the distribution of distances between entrant (exiting) firms and remaining firms is, in most industries, not significantly different from a random distribution. These results suggest that most industries in Japan neither become more localized nor more dispersed over time and are in line with similar findings by Duranton and Overman (2008) for the UK. Fourth, a comparison with the service sector indicates that the share of localized industries is higher in manufacturing than in services, although the extent of localization among the most localized manufacturing industries is smaller than that among the most localized service industries, including financial service industriesMicro-geographic data, Economic geography

The Effectiveness of Public Credit Guarantees in the Japanese Loan Market

This paper examines the effectiveness of public credit guarantee programs in not only increasing the availability of loans to small and medium enterprises (SMEs), but in also improving the ex-post performance of borrowing firms. Using a unique panel data set, we identify the effects of a massive credit guarantee program implemented by the Japanese government from 1998-2001. While we do find that the availability of loans increased for program participants, when loans were provided by undercapitalized banks the increased liquidity persisted for only a few years. Further, the ex-post performance of program participants, with the exception of firms with sizable net worth, deteriorated relative to their non-participating counterparts.Credit crunch, Small and Medium Enterprises, Loan guarantees, Matching estimation

The Localization of Interfirm Transaction Relationships

Using a unique dataset of more than 140,000 manufacturing firms in Japan containing information on their suppliers and customers, this paper looks at the physical distances be- tween transaction partners to examine the localization of transaction relationships. We find the following. First, ntrols for the location of firms and their potential partners, transaction relationships in about 90-95% of the 150 three-digit manufacturing industries can be labelled as localized at distances of 40km or less. This indi- cates that physical distance is a key factor in firmsf choice of transaction partners. Second, based on a counterfactual that controls for the average distance of transaction relationships in the manufacturing sector as a whole, we find that in about 40% of industries transaction relationships are localized at short distances of up to 40km. Third, the extent of industrial localization and the extent of the localization of transaction relationships are positively cor- related. However, there are a number of exceptions and we provide potential explanations for these