The Japanese economy experienced prolonged recessions during the 1990s.
Previous studies suggest that evergreen lending to troubled firms known as "zombie
firms" distorted market discipline in terms of stabilizing the Japanese economy and
caused significant delays in the economy's recovery. However, the eventual
bankruptcy of zombies was rare. In fact, a majority of the "zombie" firms
substantially recovered during the first half of the 2000s. The purpose of this paper is
to investigate why zombie firms recovered in Japan. We first extend the method of
Caballero, Hoshi, and Kashyap (2008) and identify zombies from among the listed
firms. Subsequently, we investigate the nature of corporate restructuring that was
effective in reviving zombie firms. Our multinomial logistic regressions suggest that
reducing the employee strength of zombie firms and selling its fixed assets were
beneficial in facilitating their recovery. However, corporate restructuring without
accounting transparency or by discouraging incentives for managers was ineffective.
In addition, corporate restructuring lacked effectiveness in the absence of favorable
macroeconomic environment as well as substantial external financial support.
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