Investment Behavior of Reputable Firms After the Recovery of Zombie Firms: “Conservatism” and the “Pseudo Financial Constraint Effect”
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The sluggish job creation and investment of reputable firms are considered to have delayed structural adjustments in Japan’s corporate sector during the second stage of the lost two decades. At the same time, some healthy firms overinvested in their existing lines of business and suddenly faced difficulties owing to the substantial change in the business environment. This chapter discusses what happened to healthy firms behind these seemingly contradictory phenomena, using the concept of “conservatism,” which refers to the tendency to insist on the status of reputable firms such as a higher credit rating, zero-leverage, and non-intervention by any provider of funds. The estimation of an investment equation to test this conjecture provides evidence of what we call “pseudo financial constraint effect,” under which investment tends to be excessively restrained in essence to keep the status of zero-leverage; whereas it is excessively accelerated in a booming economy through passive responses to substantial increases in current cash flow. In general, conservatism in this sense thus decelerated the reallocation of assets after the partial exit of alleged zombie firms and undermined the competitiveness of healthy firms because of a lack of innovation.
KeywordsUnderinvestment Overinvestment Conservatism in reputable firms Zero-leverage Pseudo financial constraint effect
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