The Effect of Government Bank Lending : Evidence from the Financial Crisis in Japan

We find that increases in lending by Japanese Government Owned Bank (GOB) during the crisis in early 1990's had a strong incremental impact on firm level investment, especially for credit constrained firms. Firms have better future accounting performance when their investment is associated with increases in GOB lending. The impact of increases in private bank lending on real investment is much smaller than that of GOB lending. This is partly driven by the tendency of private banks to support zombie firms and partly due to an increase in precautionary cash holdings of firms receiving private bank credit. Thus, our results show that direct intervention by GOBs can be effective in mitigating credit constraints and stimulating investment during a crisis, even for publicly traded companies