Corporate Debt Restructuring and Public Financial Institutions in Japan -Do Government-Affiliated Financial Institutions Soften Budget Constraints?

There are two different views on the effects of public financial institutions on corporate debt restructuring : the soft budget view and the hard budget view. The former view, which is held by Kornai (1979, 1983), Dewatripont and Maskin (1995), and others insists that because centralized public financial institutions have difficulty committing themselves to refrain from providing additional funds to distressed firms, corporate reorganizations often result in overinvestment. On the other hand, the latter view argues that public financial institutions should prefer corporate liquidation rather than the continuation of business because public financial institutions are secured by mortgages to a greater extent and are more reluctant to forgive the debts than private financial institutions. In this paper, I have empirically examined the role and impact of public financial institutions, government-affiliated financial institutions in particular, from the viewpoints of debtor-in-possession (DIP) financing and bankruptcy procedures for distressed firms. The conclusions of this paper are as follows. In the DIP financing, the Development Bank of Japan always takes the lead, followed by private financial institutions. Namely, so-called cowbell effect may exist, which is inconsistent with the hard budget view. Regarding the selection of bankruptcy procedures, firms that owed to government-affiliated financial institutions have a tendency to opt for private procedures which have the effect of delaying a drastic debt restructuring. This is consistent with the soft budget view.public financial institutions, bankruptcy procedures, debtor-in-possession financing

Does the Japanese Closed-End Fund Puzzle Exist? An Empirical Study of the Efficiency of the Financial Market in Japan

ABSTRACT This paper examines the efficiency of the Japanese financial market from the point of divergence of the net asset values of an ETF (Exchange Trade Fund) and its prices. "Discounts," which mean the ETF price is lower than its net asset value per share, were found on the average, and no co-integration relationships between the two variables were observed, implying that arbitrage opportunities exist. Furthermore, a correlation between the changes in the discount rates and the small capital stock index were found, consistent with the Investor Sentiment Hypothesis of the so-called closed end fund puzzle. However, these phenomena were not observed in an ETF (i.e., Standard & Poor's Depositary Receipts traded in the U.S). JEL Classification: G12, G14, G1

Financial Crises, Bank Lending, and Trade Credit:Evidence from Chinese Enterprises

Using Chinese firm-level data from 2006~2014—which includes the period of the recent financial crisis—we test whether firms, particularly small and medium enterprises (SMEs) that are financially constrained, are more likely to use or depend on trade credit. We also compare enterprises by ownership structure to determine which type of enterprises use trade credit more than bank loans. We then study the effect of the financial crisis of 2008 to observe whether firms increased their use of trade credit right after the crisis. We expect SMEs that are financially constrained to depend more on trade credit during the financial crisis. This may suggest the existence of a substitution relationship between bank loans and trade credit in conditions where enterprises are highly constrained financially or during periods of financial crisis

Corporate Debt Restructuring and Public Financial Institutions in Japan -Do Government-Affiliated Financial Institutions Soften Budget Constraints?

There are two different views on the effects of public financial institutions on corporate debt restructuring: the soft budget view and the hard budget view. The former view, which is held by Kornai (1979, 1983), Dewatripont and Maskin (1995), and others insists that because centralized public financial institutions have difficulty committing themselves to refrain from providing additional funds to distressed firms, corporate reorganizations often result in overinvestment. On the other hand, the latter view argues that public financial institutions should prefer corporate liquidation rather than the continuation of business because public financial institutions are secured by mortgages to a greater extent and are more reluctant to forgive the debts than private financial institutions. In this paper, I have empirically examined the role and impact of public financial institutions, government-affiliated financial institutions in particular, from the viewpoints of debtor-in-possession (DIP) financing and bankruptcy procedures for distressed firms. The conclusions of this paper are as follows. In the DIP financing, the Development Bank of Japan always takes the lead, followed by private financial institutions. Namely, so-called cowbell effect may exist, which is inconsistent with the hard budget view. Regarding the selection of bankruptcy procedures, firms that owed to government-affiliated financial institutions have a tendency to opt for private procedures which have the effect of delaying a drastic debt restructuring. This is consistent with the soft budget view.public financial institutions, bankruptcy procedures, debtor-in-possession financing, Japan