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Zombies on the Brink: Evidence from Japan on the Reversal of Monetary Policy Effectiveness

Author

Listed:
  • Mr. Gee Hee Hong
  • Ms. Deniz O Igan
  • Dongyeol Lee

Abstract

How does unconventional monetary policy affect corporate capital structure and investment decisions? We study the transmission channel of quantitative easing and its potential diminishing returns on investment from a corporate finance perspective. Using a rich bank-firm matched data of Japanese firms with information on corporate debt and investment, we study how firms adjust their capital structure in response to the changes in term premia. Investment responds positively to a reduction in the term premium on average. However, there is a significant degree of cross-sectional variation in firm response: healthier firms increase capital spending and cash holdings, while financially vulnerable firms take advantage of lower long-term yields to refinance without increasing investment.

Suggested Citation

  • Mr. Gee Hee Hong & Ms. Deniz O Igan & Dongyeol Lee, 2021. "Zombies on the Brink: Evidence from Japan on the Reversal of Monetary Policy Effectiveness," IMF Working Papers 2021/044, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2021/044
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    Cited by:

    1. Kotone Yamada & Yukio Minoura & Jouchi Nakajima & Tomoyuki Yagi, 2023. "Corporate Finance Facility and Resource Allocation: Research Trends and Developments during the Spread of COVID-19," Bank of Japan Working Paper Series 23-E-1, Bank of Japan.
    2. Moritz Schularick, 2021. "Corporate indebtedness and macroeconomic stabilisation from a long-term perspective," ECONtribute Policy Brief Series 024, University of Bonn and University of Cologne, Germany.

    More about this item

    Keywords

    Transmission of unconventional monetary policy; Quantitative easing; Reversal rate; Zombie firms; Corporate balance sheet; Term premium; Corporate investment; WP; zombie firm; firm level; capital structure; coverage ratio;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G3 - Financial Economics - - Corporate Finance and Governance

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