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 t han 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 performe d 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. W e show further that exogenous shocks to banks during the negotiations leadi ng to the Basle Accord affected bank borrowers significantly.