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

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  • Kenya Fujiwara

    (PRI)

Abstract

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.

Suggested Citation

  • Kenya Fujiwara, 2006. "Corporate Debt Restructuring and Public Financial Institutions in Japan -Do Government-Affiliated Financial Institutions Soften Budget Constraints?," Finance Working Papers 22595, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:financ:22595
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    public financial institutions; bankruptcy procedures; debtor-in-possession financing;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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