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

Author/Editor:

Gee Hee Hong ; Deniz O Igan ; Do Lee

Publication Date:

February 19, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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.

Series:

Working Paper No. 2021/044

Frequency:

regular

English

Publication Date:

February 19, 2021

ISBN/ISSN:

9781513570037/1018-5941

Stock No:

WPIEA2021044

Format:

Paper

Pages:

41

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