Government bank lending and corporate investment during a crisis: evidence from Japan

This paper examines the effect of direct lending by government-owned banks (GOBs) on corporate investment among publicly traded industrial firms in Japan during the 1990s financial crisis. We find that increases in GOB lending during the crisis have a strong incremental impact on investment, while government banks do not cherry-pick firms that could invest more. GOB lending eases credit constraints when private bank loans contract during the crisis, especially when a firm's main bank is highly exposed to zombie borrowers. For such credit-constrained firms, investment increases and future performance improves as GOB lending increases. Political connections with the government do not drive the results. Our results show that direct GOB intervention during crises can effectively stimulate positive, value-creating corporate investment, whereas private bank lending during the crisis does not have such effects.