A Banking Crisis and the Exit Of Small Firms : Evidence from Japan in the 1990s

Over the 1990s when Japan's city banks suffered from nonperforming loans, the number of small manufacturing establishments substantially declined. We use a heterogeneous firm model and examine how a banking crisis intensifies the exit of small firms. Our model predicts that a banking crisis has a heterogeneous impact on firms through their loan financing share and local loan interest rates. An increase in nonperforming loans causes the rise of local loan interest rates, which increases capital costs, particularly for small firms that rely on local banks for their capital financing. We use Japan's manufacturing census data and show that smaller, less productive establishments became more likely to exit during the banking crisis