Do banking shocks affect borrowing firm performance? An analysis of the Japanese experience

From 1990 to 1993, the typical firm on the Tokyo Stock Exchange lost more than half of its value, and banks experienced severe adverse shocks. We show that firms whose debt had a higher fraction of bank loans in 1989 performed worse from 1990 to 1993 and also invested less than other firms did. This effect holds when we control for variables that affect firm performance. We show further that exogenous shocks to banks during the negotiations leading to the Basle Accord affected bank borrowers significantly.