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The Interaction Effect in a Nonlinear Specification of Bank Lending: A Reexamination of ``Unnatural Selection"

Author

Listed:
  • Inoue, Hitoshi
  • Nakashima, Kiyotaka
  • Takahashi, Koji

Abstract

Peek and Rosengren (2005) suggested the mechanism of ``unnatural selection,'' where Japanese banks with impaired capital increase credit to low-quality firms because of their motivation to pursue balance sheet cosmetics. In this study, we reexamine this mechanism in terms of the interaction effect in a nonlinear specification of bank lending, using data from 1994 to 1999. We rigorously demonstrate that their estimation results imply that Japanese banks allocated lending from viable firms to unviable ones regardless of the degree of bank capitalization.

Suggested Citation

  • Inoue, Hitoshi & Nakashima, Kiyotaka & Takahashi, Koji, 2018. "The Interaction Effect in a Nonlinear Specification of Bank Lending: A Reexamination of ``Unnatural Selection"," MPRA Paper 89087, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89087
    as

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    File URL: https://mpra.ub.uni-muenchen.de/89087/1/MPRA_paper_89087.pdf
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    References listed on IDEAS

    as
    1. OGURA Yoshiaki & OKUI Ryo & SAITO Yukiko, 2015. "Network-motivated Lending Decisions," Discussion papers 15057, Research Institute of Economy, Trade and Industry (RIETI).
    2. Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August.
    3. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    4. Max Bruche & Gerard Llobet, 2014. "Preventing Zombie Lending," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 923-956.
    5. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
    6. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
    7. William D. Berry & Jacqueline H. R. DeMeritt & Justin Esarey, 2010. "Testing for Interaction in Binary Logit and Probit Models: Is a Product Term Essential?," American Journal of Political Science, John Wiley & Sons, vol. 54(1), pages 248-266, January.
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    More about this item

    Keywords

    interaction effect; nonlinear specification; probit model; forbearance lending;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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