Debt Forgiveness during the “Lost Decade”:
Impacts of the Industrial Revitalization Corporation of Japan*
Satoshi Koibuchi1
Chiba University of Commerce (CUC)

November 10, 2007 (First version)

Abstract
For the resolution of debt-overhang problem, it is needed to coordinate the allocation of
burdens of debt forgiveness among many lenders. The Industrial Revitalization Corporation ofJapan (IRCJ) succeeded to introduce new rule on burdens of debt forgiveness proportional toshare of lending. The emergence of the IRCJ improved the performance of Japanese banking
sector by greatly mitigating disproportional excess burdens on a main-bank. Results in thispaper strongly suggest that malfunctioning of the traditional main-bank-led corporate
restructuring was a main contributor to prolonged non-performing loan problem in Japan.

Keywords: Debt forgiveness, Debt overhang, Main bank, Event study
JEL#: G12, G21, G33.

* The Japanese version of this paper was presented at the Monthly Workshop in The

Institute of Statistical Research on July 20, 2007, and the Macro-Finance Workshop in
the Economic Institute of the Hitotsubashi University on October 25, 2007. Author
would thank the workshop participants for their useful comments.
1 Faculty of Business and Economics Department, Chiba University of Commerce(CUC), 1-3-1 Konodai, Ichikawa, Chiba, JAPAN 272-8512. Tel: +81-47-373-4297，
Email: koibuchi@cuc.ac.jp
11. Introduction

Japanese economy experienced a prolonged slump after the collapse of the asset price bubbleof the late 1980s. Although there were a large number of factors that had caused “thelost-decade”, it is widely recognized that problem of non-performing loans was one of major
sources for the prolonged slump. However, such a decade-long problem had been suddenly
resolved after a turning point around 2003.
Figure 1 depicts the outstanding of risk management loans for major banks and regionalbanks, respectively. Non-performing loan problem for the major banks peaked at March 2002,
but amount of risk management loans and its share to total lending steeply declined up until
March 2005. What has happened in the Japanese banking sector during the period from the late2002 to 2003?
Impetus comes from the announcement of “The Anti-Deflation Package” and “The Financial
Revitalization Program” in October 2002. “The Financial Revitalization Program” declared that
bad loan outstanding share to the total lending for the major banks is forced to declines from
8.4% at that time to around 4.0% for two and half years. Actually, in May 2003, Risona Bank,
one of the most ailing major banks, was nationalized, and in November, Ashikaga Bank, a large
regional bank, was liquidated under the Financial Reconstruction Law2.
The Industrial Corporate Revitalization of Japan (the IRCJ) was established to respond “TheFinancial Revitalization Program” to resolve the debt-overhang problem in the corporate sector
in Japan. From the beginning of its operation in May 2003, it supported the restructuring of 41
debt-ridden companies including the symbolic bad large companies like Daiei and Misawa
Homes, and was resolved in March 2007, one year before its planned termination.
Figure 2 shows that cumulative abnormal return of Japanese banking sector, measured by thestock price of Topix banks ETF, from July 2002 to March 2005. Apparently, the stock price ofJapanese banking sector greatly recovered from 2003 to 2004, which was almost same periodthat several policies including the establishment of the IRCJ were implemented under “TheFinancial Revitalization Program”.
In this paper, I focus on the role of the IRCJ and examine its impacts on the performance ofJapanese banking sector. I will compare the IRCJ-support cases with the ordinary cases without
the support by the case study and event study using the stock price of main-banks.

Watanabe (2007) provides event study on the impacts of resolution of Risona andAshikaga bank on the banking sector as a whole.

22

2. A Role of the Industrial Corporate Revitalization of Japan
Description of the IRCJ
In this paper, I would consider the impact of Industrial Corporate Revitalization of Japan(IRCJ) on the Japanese financial system. The movement to establish the IRCJ began with thepromulgation of “The Anti-Deflation Package” and “The Financial Revitalization Program” in
October 2002. The IRCJ was expected to resolve excess obligation problem in the corporate
sector behind the non-performing problem in the banking sector in response to “The Financial
Revitalization Program” (so-called Takenaka plan) that was considered as a hard-landing policy.
After that, the government introduced a bill on the Law of Industrial Corporate Revitalization ofJapan, which was enforced in April 2003. The IRCJ was established as a joint-stock company
with only two shareholders including Deposit Insurance Corporation of Japan (DIC, 98.5%) andNochu bank (1.5%). City and regional banks also funded the IRCJ by indirect equity
participation through the DIC. The IRCJ began its operation in May and announced first 3
companies with support from it on August 28.
The brief description of the process that the IRCJ announce the support to a company is asfollows. First of all, the company or its main-bank informally asks the IRCJ’s support and due
diligence (DD) prior to formal decision on the support. Second, the IRCJ briefly examines thepossibility of the support and then steps into full-scale DD to make the corporate rehabilitation
plan. After negotiation with various stakeholders, the company formally ask the assistance fromthe IRCJ when the corporate revitalization plan is completed. Immediately after the Industrial
Revitalization Committee decided the formal support on the company, the decision would beformally announced and the corporate revitalization plan released. The corporate revitalization
plan usually includes total amounts of financial assistance (debt forgiveness, debt-equity swaps
and equity participation) and its share of burdens among lenders. Together with the formal
announcement of its support, the IRCJ announces to cease collection of money by lenders, andthe IRCJ itself begins to coordinate the negotiations among lenders. After all lenders accept theshare of burdens of debt forgiveness, the IRCJ purchases the debts held by non-main lenders.
The IRCJ is supposed to sell all of claims and shares, which is referred to “exit”, within three
years from purchasing debts from non-main lenders.
After the IRCJ supported 3 companies including Kyushu Industrial Transportation, Dia
Kensetsu and Usui Department Store, for the first time, and totally 41 firms had been supported
until February 2005. In March 2006, the IRCJ sold all stakes in Skynet Asia Airways andcompleted supports for all 41 companies.
Total debt outstanding for the 41 supported companies amounts to 3.3 trillion yen (almost310% of outstanding of NPLs in the Japanese banking sector of March 2002). Total amount offinancial assistance (including equity participation and new loans) reached at 1.7 trillion yen
while amount of debt purchased by the IRCJ was 1.0 trillion yen in total.
In the following analysis, I focus on major 9 cases, which includes Kyushu Industrial
Transportation, Dia Kensetsu, Mitsui Mining, Kimmon Manufacturing, Kanebo, Taiho
Industries, Daikyo, The Daiei, and Misawa Homes Holdings. Total debt outstanding for these 9companies amounts to 87% of all 41 cases, 88% for all debt purchase, and 84% for all financial
assistance. As reported in Table 2, all of main-banks of the major 9 companies are mega banks
including Mizuho and Mizuho Corporate Bank, SMBC, UFJ Bank, and Resona Bank.
Traditional main-bank-led corporate restructuring
To consider the role of the IRCJ, first I explain why the debt forgiveness is needed to resolve
the debt-overhang problem. X is the net present value of cash flow from a project and theoutstanding of existing debts for a company is D, and liquidation value of the project is L. If I
think of the situation with D > X > L, this inequality means that the company expects positive
profits from continuation of the project but X is not large enough to repay all of existing debts.
In this situation, the project is socially beneficial but someone need to incur the cost of D−X tocontinues the project. In the joint-stock company, the first stakeholders to take this cost areexisting shareholders. However, if equity is below the D−X under the limited liability ofshareholders, the company would go bankrupt without acceptance of debt forgiveness fromexisting lenders. However, continuation of the project with debt forgiveness ordinarily does not
become the Nash equilibrium of a non-corporative game (Gertner and Schrfstein (1991)). Thisis the situation called as “a debt-overhang problem”.
The most important thing is how burdens of debt forgiveness are shared among multiple
lenders. The simplest solution of this problem would be a proportional allocation of burdens(pro rata) on lenders according to their share in the total borrowing of the firm. However, as
Fukuda and Koibuchi (2006a) points out, actual burdens of debt forgiveness diverge from the
proportional allocation in the case that each lender incurs disproportional cost when thecompany went bankrupt (or project was liquidated). And, as I describe in the following, it isnatural to suppose that there is large difference of the cost between large and small lender in theJapanese financial system.
First, in the discussion on traditional Japanese bank-firm relationship, a main-bank enduring
the long-term relationship with client firms has strong incentive to lead the negotiation among
lenders and mitigate the cost of financial distress for protecting his reputation as a “soundmain-bank” (Hoshi, Kashyap and Scharfstein (1990) and Sheard(1994)). Therefore, themain-bank suffers from disproportional loss of reputation that is irrelevant to small lenders.

4Second, under the situation that the prompt corrective action exists together with theregulatory capital requirement and capitals of banks are already impaired during the late 1990s
and early 2000s, the additional cost from the bankruptcy of large client firms might have a
crucial influence on the continuation of its main-bank (Sakuragawa (2003)). Because themain-bank usually has larger exposure to a client with close relationship, the main-banksuffered from disproportionally large negative shock to impair its capital comparing withsmaller lenders.
Fukuda and Koibuchi (2006a) try to seek the burdens of lenders as a solution of the Sharpley
value using the framework of a corporative game. If I suppose that only the main-bank has
disproportionally large cost of Z when the company is liquidated, the main-bank burden of debt
forgiveness derived from the Sharpley value is extremely large. In contrast, small lenders do notbear the enough burdens proportional to their share of lending. (See Fukuda and Koibuchi for
detail of the model.) It is inevitable for the main-bank to incur the cost of Z when its client was
liquidated. If every small lender precisely understands this situation, bargaining power of themain-bank is extremely weak in the negotiation on allocation of burden of debt forgiveness.
In the traditional Japanese main-bank system, the main-bank with larger Z, which isaccompanied with close bank-firm relationship, has strong incentive to bear thedisproportionally large burdens of debt forgiveness, and therefore swiftly solve thedebt-overhang problem by leading the negotiation among lenders. However, under the situationthat bank capitals are heavily impaired and so many debt-ridden companies are prevailing in theJapanese economy, effectiveness of the main-bank-led debt forgiveness is considered to beeroded substantially.
Delegation to the IRCJ
The most important role of the IRCJ for the main-bank is that the IRCJ takes over the role ofnegotiator to coordinate the allocation of burdens of debt forgiveness from the main-bank. Thisis significant difference comparing with the cases under the “Guideline for Private Liquidation”.
In the Guideline, the main-bank has to pursue the role to lead the coordination among lenders.
According to my discussion using the corporative game, the main-bank with large inherent costof Z has to bear the extremely large burdens because its bargaining power is extremely low.
However, if the IRCJ, which is free from the main-bank’s cost of Z, leads the coordination
among lenders, the IRCJ has a power to force new rule of proportional burdens of debt
forgiveness to small lenders according to share of lending. So I argue that the support from the
IRCJ greatly mitigates the excess burdens of the main-bank to resolve the debt-overhang
problem. In the following section, I will compare the IRCJ-support cases with the ordinary
cases without the support by the case study and event study using the stock price of main-banks.

5

3. Impacts on burdens of main banks
Excess burdens on main banks
In the Japanese economy during the late 1990s and the early 2000s, many large companies
underwent debt forgiveness to resolve their debt-overhang problem. In this section, first I
consider major cases of debt forgiveness, called as “the ordinary cases”, that were announced by
the large companies from 1998 to 2005. These are 39 cases related to 35 firms that I could
identify the actual share of their main-banks’ burdens of debt forgiveness by financial
statements, disclosure information, and news reports.
Financial assistance from a bank to its client firm mainly includes three types; waiver of an
obligation, debt-equity swaps, and acceptance of preferred shares. First, in the waiver of an
obligation (debt forgiveness for lenders), creditors forgive some part of claims, and the debtor’s
obligations are completely waived. Profits from the waiver are generally included in the income
statement of the firm in the fiscal year end immediately after the debtor and its lenders agree on
debt forgiveness. Second, debt-equity swaps (DES) are financial instruments to issue shares tothe bank on an exchange with some part of claims held by the bank. Therefore, the debt-equity
swaps are accompanied by direct reduction of outstanding of firm’s debt although there is no
waiver profit in the income statement. Third, in the acceptance of preferred shares by the bank,capital will increase but no direct reduction of outstanding of firm’s debts. I include only debt
forgiveness and debt-equity swaps to calculate the total amount of debt forgiveness for eachcase because these two instruments are accompanied by direct reduction of outstanding of firm’s
debt.
While I identify a main-bank as a largest lender for the company, “Main-bank share ofburdens” is defined as the main-bank’s burdens of debt forgiveness divided by the total amountof debt forgiveness and “Main-bank share of borrowing” is calculated as the borrowing from themain-bank divided by the total borrowing prior to debt forgiveness announcement. In the caseof the proportional allocation of debt forgiveness, “Main-bank share of burdens” is equal to“Main-bank share of borrowing”. If “Main-bank share of burdens” exceeds “Main-bank share ofborrowing”, the excess burdens of debt forgiveness on the main-bank is positive.
Figure 3 depicts that the relationship between “Main-bank share of burdens” and “Main-bankshare of borrowing” for the ordinary cases. Surprisingly, “Main-bank share of burdens” exceeds“Main-bank share of borrowing” for all cases. This means that the main-bank disproportionallybears most of burdens of debt forgiveness while small lenders bear little burdens during the lost
decade in Japan.

6Figure 4 depicts that same relationship for the 9 IRCJ-support cases. As it is easily recognized,
all cases are scattered around 45 degree line, which means that proportional allocation of
burdens of debt forgiveness is applied to the lenders under the support from the IRCJ. So themain-bank only bears the burdens proportional to its share of borrowing in the IRCJ-support
cases.
I now consider regressing “Main-bank share of burdens” on “Main-bank share of borrowing”
with a constant term. Table 1 reports the result using alternative samples. In the estimation using
all sample for the ordinary cases, reported in the first row, the estimated coefficient of“Main-bank share of borrowing” is 0.53 and the estimated constant term is 0.50, and both arestatistically significant at 1% level. Therefore, we can interpret the average excess burden on the
main-bank, which is not explained by the “Main-bank share of borrowing”, amounts to about
50% for the ordinary cases.
Second row of Table 1 reports the regression result using the sample of 5 cases (Iwataya
Department Store, Toyo Shutter, Nippon Yakin Kogyo, Seibu Department Store and Sata
Construction) whose debt forgiveness was conducted following the “Guide Line for Private
Liquidation”. In this case, the estimated constant term is 0.42 and statistically significant at 1%
level. This result shows that the “Guide Line for Private Liquidation”, which was introduced by
the major players in the financial sector September 2001, failed to mitigate the large excess
burdens of debt forgiveness on the main-bank.
In contrast, the result of estimation using the sample of IRCJ-support cases shows that theestimated constant term takes very small value, 0.03, that is not different from zero at any
significance level. This means that excess burden of main-bank suddenly disappeared in thecases with support from the IRCJ.
In the traditional main-bank relationship in Japan, the main-bank was supposed to lead thecorporate restructuring by bearing disproportional burdens comparing to its share of borrowing.
The results from Figure 1, Figure 2 and Table 1 suggest that such a special role of the main-bankat the time of corporate distress had been observed up until the mid-2000s, but such a role wasdramatically changed by the intervention of the IRCJ.
Burdens on the IRCJ
Excess burden on the main-bank disappears in the IRCJ-support cases while large excess
burdens are observed for the ordinary cases. Who bears the burdens of debt forgiveness in the
IRCJ-support cases? One possibility is that the IRCJ subsidies the company by fixing the priceof debts for non-main lenders extremely high.
To assess this possibility, Table 2 reports burdens of the IRCJ and non-main lenders
calculated from data published by the IRCJ. According to these data, the purchasing prices of7

debts from non-main lenders, denoted by (B), are from 30% to 70% against their book value.
Substantial burdens of non-main lenders exceed the total amount of financial assistance (sum ofdebt forgiveness and debt-equity swap) in 6 cases excluding Kanebo, Taiho Industries, and The
Daiei. This means that small lenders bear the all of burdens of debt forgiveness and the IRCJ
bears nothing at all. And, in other 3 cases, substantial burdens of non-main lenders exceed atleast the total amount of debt forgiveness, the IRCJ’s burden depends on the ex post profit fromsales of shares that the IRCJ acquired through debt-equity swaps.
Table 3 reports the IRCJ’s profit from the sales of shares in the case for the equity
participation by the IRCJ. Surprisingly, the IRCJ earned the substantial amount of profits in allcases while its rate of returns varies from 11% for the sales of Kanebo Cosmetics to 356% for
those of Kyushu Industry Transportation.
According to these data, the IRCJ did not suffered from any losses through purchasing andselling debts held by non-main lenders in all cases.
Existing shareholders also shared the burdens to resolve the debt-overhang problem. The
corporate revitalization plan published by the company includes the section on the“Shareholder’s responsibility”. Table 4 shows that the plans were accompanied with thesubstantial degree of equity reduction exceeding 90% in all cases. Together with substantial
amount of capital increase, reduction of equity is thought to dilute the value attributable toincumbent shareholders.
Overall, the results in this section strongly suggest that non-main lenders bear the
proportional burdens of debt forgiveness through the appropriate purchasing price by the IRCJ.
The IRCJ successfully sold the supported firms at adequately high value and did not suffer fromany ex post losses through supporting the debt-ridden companies.

4. Hypothesis and Methodology
In the traditional Japanese financial system, main-banks were always leading the negotiation
among lenders to resolve the debt-overhang problem for their client firms by disproportionallybearing larger share of burdens of debt forgiveness comparing to small lenders. As I discussed
in the previous section, extremely large excess burdens on the main-bank were commonly
observed even for the ordinary cases of major Japanese listed companies until the mid-2000s.
Moreover, bank capitals for most of major Japanese banks were heavily impaired by hugeamount of disposal of non-performing loans until the late 1990s. Therefore, given the excess
burdens on the main-bank in the resolution of debt-overhang problem, market participants may
perceive a request of debt forgiveness by a debt-ridden client as negative news on the valuation

8

of its main-bank. In this case, we would observe significant negative impacts on equity price ofthe main-bank when the client announced the request of debt-forgiveness for its lenders.
However, it is quite natural that market participants perceive the deterioration of financial
condition of the debt-ridden company and expect the coming request of debt forgiveness prior to
the formal announcement by the company. To the extent that investors expected the possibilityof debt forgiveness ex ante, negative impacts on the valuation of the main-bank might be lesssignificant when the request was formally announced.
In contrast, if the IRCJ announced that the company would take the debt forgiveness under its
support, the IRCJ would apply the proportional allocation of burdens of debt forgiveness to alllenders. This means that excess burdens of main-banks would be substantially mitigated. If
market participants precisely predict the consequences under the IRCJ scheme, they might
perceive the announcement of debt forgiveness with support from the IRCJ as positive news on
valuation of the main-bank. In this case, we would observe significant positive impacts onequity price of the main-bank when the IRCJ announced the support to its client firms.
In the following section, I will test this hypothesis by examining how the abnormal returns of
main-banks responded to the events that their troubled clients requested the debt forgiveness.
Identifying the event day
To examine the hypothesis, I construct the abnormal returns of the main-banks whose client
firms requested debt forgiveness for lenders over two kinds of event windows.
A first event window is around an event day when a news report on possibility of request ofdebt forgiveness (or financial assistances including debt-equity swap) was released to themarket participants for the first time. In the IRCJ-support cases, the company (and/or its
main-bank) has to informally ask whether the company is eligible to take the support from the
IRCJ, and has to take two-step due-diligence (DD) prior to the formal decision by the Industrial
Revitalization Committee. Though the IRCJ have a strict rule on the informal offer by thecompany to be confidential, news papers actually reported the evidence on “ex ante informal
offer” of the companies in the most of cases before the decisions on the IRCJ-support wereformally announced.
I define this event day as a “first news report” on request for debt forgiveness with or without
the IRCJ-support. This event day is a first point of time that investors perceive the possibility ofthe debt forgiveness of the company and whether its scheme would be with or without support
from the IRCJ, so impacts on equity price of its main-bank are expected to be large. I specified
the date of “first news report” for each case by searching for all articles including the company
name in major newspapers (Nikkei 4 papers, Asahi, Yomiuri, Mainichi and Sankei) from 2002
to 2004.

9

A second event window is around an event day when the company formally announce its
corporate revitalization plan including the request of debt forgiveness for their lenders.
Especially for the IRCJ-support cases, this event day is precisely specified as the day when the
IRCJ formally announces the name of the company to be supported and releases its corporate
revitalization plan including request of debt forgiveness for their lenders. I define this event day
as a “formal announcement of the (corporate revitalization) plan”, which is expected to havemore concrete information on the debt forgiveness of the company than the “first news report”
event. The corporate revitalization plan usually includes information on the total amount of debt
forgiveness and main-bank’s consent to the debt forgiveness. More importantly, in this point oftime, the market participants know whether the company formally takes the support from the
IRCJ, which has substantial impacts on the main-bank’s burdens of debt forgiveness as I
discussed in section 2. I specified the date of this event window for each case by article searchusing Nikkei Telecom 21 for the ordinary cases, and by news releases on the IRCJ’s website for
the IRCJ-support cases, respectively.
Table 5-1 shows the list of event days of “first news report” and “formal announcement of theplan” under the IRCJ-support for each of the IRCJ-support cases. The “ex ante informal offers”
by the companies were reported by the major news papers for the 7 IRCJ-support cases
excluding the Kimmon Manufacturing and Taiho Industries, which were relatively smaller andless influential in the industry than others. Actually, investors actively traded the stocks ofrelated companies and its-main banks based on the news.
Table 5-2 shows the list of event days of “first news report” and “formal announcement of theplan” for each of the ordinary cases. Only 14 cases among all of 39 cases have the news reports
on request of debt forgiveness prior to the formal announcement of the plan by the company.
If the case has both of the event days of the “first news report” and the “formal announcementof the plan”, I define two different event day as the first event (e = 1) and second event (e = 2),
respectively. If the case does not have the event day of the “first news report”, I define the“formal announcement” as the first event (e = 1), and nothing in the second event. Summingthese first and second events for all cases, totally there are 68 event windows associated with 15
event days for the IRCJ-support cases and 53 event days for the ordinary cases.

Event study methodology
To obtain estimates of abnormal returns for main-banks, I run standard market model
regressions of realized daily stock return for main-bank i of client firm j, Rijt , on a measure of
the realized daily return of market index, Rmt , and 3 daily dummies for each event e, Dijk ,e ,10k ∈ [−1, 1] , which take the value of one for days inside the event window and zero outside thewindow,
1

Rijt = α ij + β ij Rmt + ∑ ∑ γ ijk ,e Dijk ,e + ε ijt .

(2)e k = −1

The coefficients γ ijk ,e for bank i measure the daily abnormal returns inside the event window.

ε ijt is a random error. Estimation period includes 150 trading days before the first event day (e= 1) and 40 trading days after the second event day (or the first event day if nothing in e = 2).
The length of these sample periods conforms closely to those used in previous studies (e.g.
Ongena, Smith, and Michalsen (2003), Brewer III, Genay, Hunter, and Kaufman (2003)). Sumsof the daily abnormal return estimates γˆijk ,e over the event windows yield cumulative
abnormal return (CAR) estimates. In the following section, I consider three event windows,
single day abnormal returns, AR[0], cumulative abnormal returns, CAR[-1,0], including one day
before the event day, and CAR[0,1], including one day after the event day, CAR[0,1].

5. Estimation Results
Figure 5 reports single day abnormal returns of main-bank, AR[0], over the events of “First
news reports” and “Formal announcement of the plan” for each of the ordinary cases (39 cases,
chronological order from the left) and the IRCJ-support cases (last 9 cases). The figure showthat announcement of client firm’s request on debt forgiveness have generally negative impacts
on the stock price of its main-bank in many events for the ordinary cases excluding several
events like “Formal announcement of the plan” of Toyo Shutter and Nissan Diesel. Even thesecases, their abnormal returns at event of “First news reports”, which is first event day whenmarket participants perceive the possibility of debt forgiveness for the first time, are marginal
and much smaller than those of formal announcement of the plan.
In contrast, most of abnormal returns of main-bank for the IRCJ-support case show positive
signs regardless of the choice of event days, which means that the announcement of client firm’srequest on debt forgiveness brought about positive impacts on the stock price on main-bankunder the scheme with support from the IRCJ. Interestingly, in the first event day for the
Kyushu Industrial Transportation, one of three first cases supported by the IRCJ, abnormal

11

return of its main-bank, Mizuho Bank (Mizuho HD), have 9.5%, which is highest among allcases.
Event study results
For analyzing the statistical importance of difference between the ordinary cases and the
IRCJ-support cases, I take a simple average of ARs (and CARs) within each sample under theassumption that the estimates are independent across events, and then use t-test to judge its
significance. Table 6(A) reports the sample average and p-value for AR[0], CAR[-1,0] andCAR[0,1] by using all events including “first news reports” and “formal announcement of theplan”.
From a main-bank’s perspective, the events have a differential impact on stock pricedepending on whether the case takes support from the IRCJ. For the IRCJ-support cases, sample
average of (cumulative) abnormal returns are around 3% (0.03) and statistically significant
positive sign at 1% level for the AR[0] and CAR[-1,0], and at 5% for the CAR[0,1]. In contrast,
for the ordinary cases without the IRCJ-support, sample average of AR[0] of a main-bank is-0.009 and statistically significant at 5% level. In this case, average cumulative abnormal returnsof other event windows, CAR[-1,0] and CAR[0,1], are around zero and not statisticallyimportant at any significance level. Even if I extract the 12 cases in 2003-2004 from theordinary cases that is those in a same period as the IRCJ-support cases were announced debt
forgiveness, the sample average never show statistically significant positive value in all event
windows.
Table 6(B) reports the sample means and its p-values using the sample picked up only firstevent, either “first news report” or “formal announcement if the plan”, for each case. The resultis expected to show more precisely the first impact of debt forgiveness announcement on the
main-banks’ valuation because it is the timing when market participants perceived thepossibility of debt forgiveness for the first time. However, results are similar with those in Table
7(A). The stock price of main-bank whose clients take debt forgiveness under the IRCJ-scheme
increases nearly 3% (0.028) in all event windows and statistically significant at 5% in the AR[0]and CAR[-1,0]. On the other hand, all of sample means for the ordinary cases shows negativevalues, especially AR[0] is below -1% (-0.014) and statistically significant difference from zeroat 1% level.
The different impact of debt forgiveness announcement on a main-bank between the
IRCJ-support and the ordinary cases is consistent with my hypothesis that the investors
precisely predict the importance of the IRCJ’s involvement on negotiation among lenders. If a
debt-ridden company simply requests debt forgiveness for its lenders, the main-bank’s burdensof debt forgiveness are expected to be disproportionally large because of the rule of traditional

12main-bank system. However, when the company requests debt forgiveness under the support
from the IRCJ, the allocation of burdens will be proportional to lenders’ share of borrowing andthe burdens of the main-bank could be greatly lightened by the IRCJ-led negotiation among
lenders. Therefore, the results in Table 6 shows that the announcement of debt forgiveness had
statistically significant positive impacts on stock prices of the main-banks in the IRCJ-support
cases while it tended to have negative impacts on those in the ordinary cases. This difference
was observed even if I restricted the sample in most recent years from 2003 to 2004.

Cross-sectional regressions
To gain a better understanding of the patterns underlying the abnormal returns documented inTable 6, I consider regressing the (cumulative) abnormal returns of the main-banks on a set ofvariables related to size of debt forgiveness, firm’s stock price, and main-bank relationshipcharacteristics. I provide a description of variables and summary statistics in Table 7.
The first variable is “Proportional Burdens of Debt Forgiveness divided by Main-bank’s
capitalization”, which measures the impact of minimum burdens of debt forgiveness on the
main-bank valuation under the assumption that the main-bank’s burden is proportional to its
share of borrowing. Main-bank’s capitalization is calculated by using the bank’s stock price of
one day before the event day (window). Sample summary in Table 7(A) shows the impact isvery large for the main-bank valuation. Sample means of this variable are 0.047 for the
IRCJ-support cases and 0.039 for the ordinary cases, respectively. I expect negative sign ofcoefficient of this variable, which means the case with larger amount of debt forgiveness has
potentially lager negative impact on the main-bank stock price on the event of debt-forgive
announcement.
The second variable is “Firm’s (cumulative) abnormal returns times Market value of equity
holding divided by Main-bank’s capitalization” to control the direct impact of the change offirm’s stock price at the event day (window) on the main-bank valuation. Firm’s stock priceunderwent great change on the event of the debt forgiveness announcement. In the Japanese
main-bank system, the main-bank usually holds substantial amount of client’s stock, so thechange of the client firm’s stock price can have substantial impact on the main-bank’s valuationin the ordinary situation. Therefore, expected sign of coefficient of this variable is positive.
However, as sample summary in Table 7(B) shows, these direct impacts on banks’ valuation
through equity holdings are nearly zero in all cases. This reflects the evidence that stock price ofthe debt-ridden company had been very low and the change of the value of stock holding
relative to main-bank capitalization had been negligibly small until one day before the debt
forgiveness announcement.

13

The third variables are dummies for the closeness of bank-firm relationship in terms of equity
ownership and bank representation on board, which are considered as proxy variables for excess
burden of debt forgiveness borne by the main-bank. Table 7(C) shows average percentage ofequity held by the main-bank is 3.31% for the IRCJ-support cases and 4.38 cases for theordinary cases. I use two kinds of dummies indicating the closeness of bank-firm relationshipthorough the equity holding. The first is “Main-bank top equity holder among outsiders”, which
is a dummy variable that takes 1 if the main-bank is the largest shareholder excluding theinsiders (owner and owner’s family, employee stock holders) at the fiscal year end prior to thedebt forgive announcement and 0 otherwise. The second is “Main-bank equity holding at legal
limit” that takes 1 if the main-bank’s equity holding is at legal limit (5.0%) at the fiscal year end
immediately before the debt forgive announcement and 0 otherwise. In terms of the bankrepresentation on board, almost all companies in sample have at least one official from its
main-bank on their board prior to the debt forgiveness. So I choose stronger definition,“Main-bank representation on President”, as a dummy indicating the close relationship with themain-bank, which takes 1 if the bank representation is a president (or a chairman) of thecompany and 0 otherwise. Expected sign of coefficients of these dummies are negative because
market participants anticipate larger excess burdens of debt forgiveness on the main-bank if themain-bank relationship is stronger.
Finally, the most important variable is a dummy for the IRCJ-support cases. If the market
participants predict the excess burden of the main-bank will be greatly mitigated and new ruleof proportional burden of debt forgiveness will be introduced, the debt forgive announcementwith the IRCJ-support have positive impact on stock price of the main-bank. If the sign ofcoefficient of IRCJ dummy is statistically significant and positive even after controlling othervariables related to various characteristics of the case, I can conclude that the support from the
IRCJ have positive impacts on the main-bank’s resolution of debt overhang problem.
Table 8-1 reports the results from regressing AR[0], CAR[-1,0], and CAR[0,1] on various
combinations of the explanatory variables. Most of coefficient estimates have the same signs as
I expected. First, “Proportional Burdens of Debt Forgiveness divided by Main-bank’s
capitalization” has a negative and statistically significant coefficient estimate that remains
robust across all specifications. The estimates suggest that 10 % increase of minimum burden ofdebt forgiveness on the main-bank brings about -1.5% decrease in AR[0] and a decrease
between -2.1 and -2.7 in CAR[-1,0] and CAR[0,-1]. Second, “Firm’s (cumulative) abnormal
returns times Market value of equity holding divided by Main-bank’s capitalization” has apositive but statistically insignificant estimate in all specification. This result reflects theevidence that this variable is very small in all samples. Third, dummies for the main-bankrelationship prior to debt forgiveness announcement have negative and statistically significant

14coefficient estimates especially for “MB top equity holder among outsiders” and “MBrepresentation on the President”. If the main-bank is a largest shareholder, (cumulative)
abnormal returns decrease by -1% to -2%. If a president (or a chairman) of company is a personfrom its main-bank, (cumulative) abnormal returns decrease by -1% to 3%.
In terms of a dummy for the IRCJ-support cases, the coefficient estimates are positive andstatistically significant at 1% level across all specifications. The estimates suggest that stock
price of the main-bank increased around 4% when the debt forgiveness would be announcedwith the support from the IRCJ.
Similar results are reported in Table 8-2, which are results for the alternative samples using
the cases from 2003 to 2004 and the all cases with the first event (first news report or formal
announcement of the plan). The dummy for the IRCJ-support cases stably takes more than 4%
across all specifications, which are statistically significant at 1% level.
These results are consistent with my hypothesis that the support from the IRCJ greatly
mitigates the excess burdens of debt forgiveness and has positive impact on the main-bankvaluation. Market participants precisely predicted the consequences under the IRCJ scheme, andthe debt forgiveness announcement to resolve the debt-overhang problem for client firms had
positive impacts on its main-bank valuation.

6. Conclusion
The IRCJ greatly mitigated the excess burdens of debt forgiveness on the main-bank byintroducing new rule on burdens of debt forgiveness proportional to lender’s share in borrowing.
This is contrast with the ordinary cases in which the main-bank born disproportionally large
burdens of debt forgiveness. Moreover, market participants precisely incorporated the new ruleof burdens of debt forgiveness in the valuation of the main-bank, and performance of theJapanese banking sector improved under the support from the IRCJ. I could observe the positive
impacts of debt forgive announcement on the stock price of the main-bank in the IRCJ-support
cases while the negative impacts were prevailing among the ordinary cases following to the
traditional rule of the main-bank-led resolution of the debt-overhang problem.
Although there were a large number of factors that had caused “the lost-decade”, it is widely
recognized that the prolonged problem of non-performing loans was one of the major sources
for the slump of the Japanese economy. Results in this paper strongly suggest that too large
excess burden on the main-bank under the traditional Japanese main-bank system was one ofmajor impediments to resolve non-performing loan problem in Japan.

15

References
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Journal of Political Economy, February 1996, vol.104, pp.1-25.
Brewer III, E., H. Genay, W. C. Hunter, and G. G. Kaufman, (2003), “The value of banking
relationships during a financial crisis: Evidence from failures of Japanese banks,” Journal of
the Japanese and International Economics 17, pp.233-262.
Caballero, R., T. Hoshi and A. Kashyap, (2006), “Zombie Lending and Depressed Restructuring
in Japan,” NBER working Paper, 12129, National Bureau of Economic Research.
Fukuda, S. and S. Koibuchi, (2006a), “Furyo Saiken to Saiken Hoki: Mein Banku no Choka
Futan”, (in Japanese) (“Non-performing Loans and Debt Forgiveness: Excess Burdens of theMain Bank”), Keizai Kenkyu (Hitotsubashi University), Vol.57, No.2, pp.110-120.
(CIRJE-J-157（http://www.e.u-tokyo.ac.jp/cirje/research/dp/2006/2006cj160.pdf）.
Fukuda, S., and S. Koibuchi, (2006b), “The Impacts of “Shock Therapy” under a Banking
Crisis: Experiences from Three Large Bank Failures in Japan,” Japanese Economic Review,
Vol.57, No.2, June 2006.
Fukuda, S., and S. Koibuchi, (2007), “The Impacts of “Shock Therapy” on Large and Small
Clients: Experiences from Two Large Bank Failures in Japan,” Pacific Basin Finance Journal,
forthcoming.
Gertner, R. and D. S. Scharfstein, (1991), “A Theory of Workouts and the Effects ofReorganization Law,” Journal of Finance, Vol.46, Issue 4, pp.1189-1222.
Hoshi, T., and A. Kashyap, (2001), Corporate Financing and Governance in Japan, The MIT
Press, Cambridge MA.
Hoshi, T., A. Kashyap, and D. Scharfstein, (1990), “The Role of Banks in Reducing the costs ofFinancial Distress in Japan,” Journal of Financial Economics, Vol. 27(1), pp.67-88.
Ongena, S., D. Smith, and D. Michalsen, (2003), “Firms and their distress banks: lessons fromthe Norwegian banking crisis,” Journal of Financial Economics 67, pp.81-112.
Peek, J. and E. S. Rosengren, (2005), “Unnatural Selection: Perverse Incentives and theMisallocation of Credit in Japan,” American Economic Review 95, pp.1144-1166.
Sakuragawa, M., (2002), Kinyukiki no Keizai Bunseki, (in Japanese), (Economic Analysis on
Financial Crisis), The University of Tokyo Press.
Sheard, P., (1994), “Main Banks and the Governance of Financial Distress,” in M. Aoki and H.
Patrick eds. The Japanese Main Bank System: Its Relevance for Developing and Transforming
Economies, Oxford University Press.
Watanabe, Y., (2007), “Nippon no Kinyu Kaikaku no Hyoka: Shijo wa Do Miteitanoka?” (inJapanese), (“Assessments on Financial Reform in Japan: How do Market Participants

16

Evaluate?), presented in 8th Macroeconomics Conference at Keio University, March 2, 2007.

17

Table 1: Determinants of main-bank burdens of debt forgivenessSample: Ordinary cases (35 firms and 39 cases) and IRCJ-support cases (9 firms and 9 cases)
Dependent variable: Share of main-bank burdens of debt forgiveness to the total
Ordinary cases

Constant
Share of main-bankborrowing to total borrowing
Adj-R sq.
Observations

IRCJ-support cases

All cases

Cases under the Guidelines
on Private Liquidation

All cases

0.508***(8.068)0.536***(3.767)0.257
390.422***(4.896)
0.617***(3.830)
0.773
5

0.039
(0.413)
1.026***(5.235)0.767
91). The t-values are reported in the parentheses. ***, **, and * indicates statistical significance at the
1%, 5%, and 10% levels, respectivelt.

18

Table 2: Burdens on non-main bank and IRCJ in the major 9 IRCJ-support cases(unit: million yen)Company namesupported by the
IRCJ(D) Burdens (E) Amount(B)(A) Amount
Main-bank(s) offeredTotal
of debt the Purchasing of non-main of financial
the IRCJ support joint
borrowing ofassistance
banks
price
IRCJ
with a supported
from thecompany(A)-(B)((B)/(A))
purchasedcompany
IRCJ

Kyushu Industrial
Transportation

Misuho Bank

52,59836,182

Dia Kensetsu

Risona Bank

193,998

18,397

Mitsui Mining
Company
KimmonManufacturing

18,733
(52%)
9,476
(52%)
58,843(33%)
11,990(76%)
47,235
(45%)
4,057
(95%)
56,588(67%)(F) Debt
forgiveness(G) Debtequity swap

17,449**16,187

15,590597

8,921**

8,507

8,507

0

120,700**

87,148

3)

67,14820,0003,888**

3,517

3,517

0

56,736*

66,54356,543

10,000

214*

850

0

850

28,183**27,07527,0750SMBC242,400

179,543

Risona Bank

30,01015,878

KaneboSMBC

555,654

103,971

Taiho Industries

UFJ Bank

8,903

4,271

DaikyoUFJ Bank

484,300

84,771

The Daiei

ＵＦＪ Bank, Mizuho
Corporate Bank,
SMBC

1,020,562

366,646

247,022(67%)

119,624*

152,583(112,583)

40,000Misawa Homes
Holdings

UFJ Bank

294,152

43,411

14,274(33%)

29,137**28,45228,45201) Sample firms are 8 large companies listed in the stock exchanges and Kyushu Industrial Transportation whose financial statements areavailable in 2002-2004.
2) "(D) Burdens of non-main bank" are defined as "(A) amount of debt the IRCJ purchased" minus "(B) purchasing price". ** attached to
the number in (D) depicts that (D) exceeds (E) while * depicts that (D) exceeds at least (F).
3) In the case of Mitsui Mining Company, the IRCJ made new loan of 19,578 million yen to the company other than the direct financial
assistance. The loan was fully pepaid by the company until March 17, 2007.
Source:This table is based on IRCJ's news releases available at the Cabinet Office's web site[http://www8.cao.go.jp/sangyo/ircj/ja/index.html].

19

Table 3: Profit on sales in the cases of equity participation by the IRCJ
Unit: million yen
Company name

Kyushu Industrial
Transportation

Mitsui Mining
Company

Equity participation by IRCJ
Total amout (DES)Name of sponsor the IRCJ sold the share
IRCJ's profit on saleto.
(rate of returns)
Proceeds from the sale of shares

Kyushu Industrial Transportation
700（DES 350）

H.I.S.
3,194

2,494(356%)

Kyushu Sanko
1,250（DES 250）

Footwork Express
N.A.1)

N.A.1)

20,000（DES 20,000）

Daiwa SMBCPI, Nippon SteelCorporation, Sumitomo Corporation
18,200

7,437
(37%)

Nomura Securities
9,237
3,000（DES 0）

Yamatake Corporation
4,6502）

1,6502）(55%)

Kanebo Cosmetics
236,000（DES 150,000）

Kao Corporation
263,401

27,401(11%)

Kanebo20,000（DES 10,000）

Trinity Investment
N.A.3）

N.A.3）

Taiho Industries

850（DES 850）

Ichinen Co,.Ltd.
1,6314）

7814）
(92%)

The Daiei

50,000（DES 40,000）

Marubeni Corporation
69,80019,800(40%)

KimmonManufacturing

Kanebo1） It is obvious that the IRCJ did not suffer any losses as a whole because the profit on sale of Kyushu Industrial
Transportation (2,494 million yen) exceeds the total amount of equity participation to Kyushu Sanko by the IRCJ (1,250
million yen).
2） This value is an author's estimation using the evidence that proceed from the sale of prefered shares held by the IRCJ,
Risona Bank and Mizuho Corporate Bank was totally 9,300 million yen.
3） It is obvious that the IRCJ did not suffer any losses as a whole because the profit on sale of Kanebo Cosmetics (27,401
million yen) exceeds the total amount of equity participation to Kanebo by the IRCJ (20,000 million yen). According to the
Nikkei Newspaper (Nikkei Kinyu December 21, 2005), the IRCJ is expected to earn the profit of 20,000 million yen in total by
the sale of the shares of Kanebo and Kanebo Cosmetics.
4） This value is an author's estimation using the calculation based on a TOB price (225 yen per share) by Ichinen Co,.Ltd.

Source: News releases of the related companies and press reports

20

Table 4: Reduction of equity, stock consolidation and capital increase in the corpotate revitalization plan
(unit: million yen)
"Shareholder responsibility" in the corpotate revitalization plan
Company name
Reduction of equity

Stock consolidation

Capital increase

Kyushu Industrial
Transportation: "massive
reduction"
Kyushu Sanko: 100.0%-

DES and the third-party
allocation of newly issued sharesto IRCJ

Dia Kensetsu

99.0%

-

-

Mitsui Mining Company

91.1%

2 shares to 1

Capital increase

Kimmon Manufacturing

90.0%

-

The third-party allocation of
newly issued share

Kanebo99.7%

10 shares to 1

The third-party allocation of
newly issued share

Taiho Industries

95.0%

-

The third-party allocation of
newly issued share and issue ofprefered stock

Daikyo99.2% for common stock
50% for prefered stock-

The third-party allocation of
newly issued share

The Daiei

99.6%

10 shares to 1

Massive capital increase

Misawa Homes Holdings

99.0%

10 shares to 1

Capital increase by the sponsor

Kyushu Industrial
Transportation

1) Sample firms are 9 major companies with support from the IRCJ (8 listed companies and Kyushu Industrial Transportation).
Source:This table is based on IRCJ's news releases available at the Cabinet Office's web site[http://www8.cao.go.jp/sangyo/ircj/ja/index.html].

21

Table5-1. List of Debt Forgiveness Cases with support from the IRCJ during 2003-2004.
IRCJ support cases (9 firms, 9 cases)
Event Date
FormalFirst news
anouncement
report on
request for debt of corporate
revitalization
forgivenes
plan under
under IRCJ
IRCJ support
supportCode

Company

Industry

Main Bank

unlistKyushu Industrial Transportation

Transportation

Mizuho Bank

20030724

20030828

8858

Dia Kensetsu

Real Estate

Resona Bank

20030724

20030828

1501

Mitsui Mining Company

Mining

SMBC

20030725

20030828

7724

Kimmon Manufacturing

Manufacturer

Resona Bank---

20040128

3102

KaneboManufacturer

SMBC

20040216

20040310

4953

Taiho Industries

Manufacturer

UFJ Bank---

20040520

8840

Daikyo (2)Real Estate

UFJ Bank

20040921

20040928

8263

The Daiei (2)Retailer

UFJ Bank

20041014

200412281722

Misawa Homes Holdings (2)Construction

UFJ Bank

20041129

20041228

22

Table 5-2: List of Debt Forgiveness Cases (Ordinary Cases) during 1998-2004.
Ordinary cases (35 firms, 39 cases)
Event Date

Code

Company

Industry

Main Bank

FormalFirst news
anouncement
report onof corporate
request for debt
revitalization
forgivenes
plan

1886

Aoki Corporation

Construction

Asahi Bank---

19981119

1808

Haseko Corporation (1)Construction

Daiwa Bank

19981118

19981218

1806

Fujita Corporation

Construction

Sakura Bank

19981114

19981224

1920

Shokusan Jutaku Sogo

Construction

Sanwa Bank---

19990122

8834

Towa Real Estate Development (1)Real Estate

Tokai Bank

19981114

19990205
19990223

1804

Sato Kogyo

Construction

Daiichi-Kangyo Bank

---

9232

Pasco Corporation

Transportation

Bank of Tokyo-Mitsubishi---

19990301

3887

Chuo Paperboard

Manufacturer

Juroku Bank

19981124

19990430

8020

Kanematsu Corporation

Wholesaler

Bank of Tokyo-Mitsubishi---

19990518

8003

Tomen Corporation (1)Wholesaler

Tokai Bank---

20000209

1837

Hazama Corporation

Construction

Daiichi-Kangyo Bank---

20000525

1861

Kumagai Gumi (1)Construction

Sumitomo Bank

20000810

20000901

1814

Daisue Construction

Construction

Sanwa Bank---

20000926

1821

Mitsui Construction

Construction

Sakura Bank

20001124

20001228

8263

The Daiei (1)Retailer

UFJ Bank

20020109

20020118

1808

Haseko Corporation (2)Construction

Chuo Mitsui Trust Bank---

20020221

8246

Iwataya Department Store

Retailer

Mizuho Bank---

20020226

1923

Misawa Homes (1)Construction

UFJ Bank---

20020301

5936

Toyo Shutter

Manufacturer

Mizuho Bank

20011122

20020308

1823

Sumitomo Construction

Construction

SMBC

---

20020426

8840

Daikyo (1)Real Estate

UFJ Bank---

20020514

7202

Isuzu Moters

Manufacturer

Mizuho Corporate Bank---

20020814

1854

Arai-Gumi

Construction

SMBC

---

20020823

5480

Nippon Yakin Kogyo

Manufacturer

Mizuho Corporate Bank---

20020918

6765

Kenwood Corporation

Manufacturer

Asahi Bank---

20020927

8834

Towa Real Estate Development (2)Real Estate

UFJ Bank---

20021105

8003

Tomen Corporation (2)Wholesaler

UFJ Bank---

20021226

unlistSeibu Department Store

Retailer

Mizuho Corporate Bank

20021218

20030114

8014

Chori

Wholesaler

Mizuho Corporate Bank

20030222

20030328

1861

Kumagai Gumi (2)Construction

SMBC

---

20030403

1805

Tobishima Corporation

Construction

Mizuho Corporate Bank

20030403

20030416

1890

Toyo Construction

Construction

UFJ Bank---

20030610

7210

Nissan Diesel Motor

Manufacturer

Mizuho Corporate Bank

20030917

20030930

8193

SuzutanRetailer

UFJ Bank---

20031027

1827

Nakano Corporation

Construction

Bank of Tokyo-Mitsubishi---

20031121

1908

Sampei Construction

Construction

Resona Bank---

20031126

1826

Sata Construction

Construction

Gunma Bank---

20040127

7211

Mitsubishi Motors Corporation

Manufacturer

Bank of Tokyo-Mitsubishi

20040517

20040521

2768

Sojitz Holdings Corporation

Wholesaler

UFJ Bank

20040720

20040726

23

Table 6: Average (cumulative) abnormal returns of main banks across evenrs(A) Average (C)ARs of main-banks across events (both of first news report and formal announcement of the plan)
Number of Events
AR[0]
CAR[-1,0]
CAR[0,1]
IRCJ-support cases (9 cases)

15

0.027
(0.000)0.036(0.000)0.033(0.019)Ordinary cases (39 cases)

53-0.009(0.022)-0.001(0.864)0.001(0.805)

2003-2004 ordinary cases 1) (12cases)

18-0.011(0.218)0.001(0.946)0.0190(0.201)(B) Average (C)ARs of main-banks across events (either first news report or fomal announcement of the plan)
Number of Events
AR[0]
CAR[-1,0]
CAR[0,1]
IRCJ-support cases (9 cases)

9

0.028
(0.026)0.028(0.022)0.028(0.179)Ordinary cases (39 cases)

39-0.014(0.000)-0.007(0.422)-0.007(0.247)

1) "2003-2004 ordinary cases" includes 12 cases that fomally announced the request for debt forgiveness in 20032004.
2) The sample in table (A) includes main-banks' ARs (or CARs) at the event days of both first news report andformal announcement of the corporate revitalization while the sample in table (B) includes those of first news
report if the case has news report prior to formal announcement, or thoese of formal announcement of thecorporate revitalization.
3) We take a simple average of ARs (or CARs) with in each sample under the assumption that the estimates are
independet across events, and use a t-test to judge significance. The average and P-value are reported in the firstrow and the second row, (in parentheses), in each cell, respectively.

24

Table 7: Sample summary
IRCJ-support cases (9 cases)

Ordinary cases (39 cases)

2003-2004 ordinary cases (12 cases)(A) Debt forgiveness
Mean(Median)Maximum(Minimum)Std.Dev.

Mean(Median)Maximum(Minimum)Std.Dev.

Mean(Median)Maximum(Minimum)Std.Dev.

0.0468(0.0223)0.2216(0.0001)

0.06960.0393(0.0154)0.1758(0.0012)0.05230.0327(0.0139)0.1758(0.0012)0.0493Firm AR[0] * Market value offirm equity holdings / MB
capitalization-0.0000('0.0000)

0.0000(-0.0001)

0.00000.0000(0.0000)

0.0010(-0.0017)

0.0003-0.0000(-0.0000)

0.0001(-0.0001)

0.0000Firm CAR[-1,0] * Market valueof firm equity holdings / MB
capitalization-0.0000(0.0000)

0.0000(-0.0001)

0.0000-0.0003(0.0000)

0.0014(-0.0133)

0.0021-0.0011(0.0000)

0.0001(-0.0133)

0.0038Firm CAR[0,1] * Market valueof firm equity holdings / MB
capitalization-0.0000(0.0000)

0.0001(-0.0002)

0.0000-0.0007(0.000)0.0007(-0.0288)

0.0046-0.0024(0.0000)

0.0000(-0.0288)

0.0083

Mean(Median)Number of
relevant
cases

Percent to
total

Mean
(Median)Number of
relevant
cases

Percent to
total

Mean
(Median)Number of
relevant
cases

Percent to
total

3.31
(4.19)--

4.38(4.79)--

4.05(4.51)--

MB top equity holder among
outsiders

-

5

56%

-

20

51%

-

5

42%

MB equity holding at legal limit

-

2

22%

-

13

33%

-

2

17%

MB representation on board

-

8

89%

-

36

92%

-

9

75%

MB representation on President(or Chairman)

-

2

22%

-

11

28%

-

2

17%

Proportional Burdens of Debt
Forgiveness / MB capitalization(B) Firm's abnormal returns(C) Main bank relationship

Percentage of equity held by MB25

Table 8-1: Cross-sectional examination of main bank (C)ARs: All Events
SampleDependet variable

All Events
CAR[-1,0]AR[0]CAR[0,1]0.001-0.003-0.000

0.000

0.021

0.016

0.017

0.021

0.013

0.018

(0.830)(0.568)(0.903)(0.997)(0.067)(0.087)(0.115)(0.054)(0.147)(0.087)-0.169-0.151-0.146-0.149-0.272-0.211-0.213-0.270-0.223-0.240(0.014)(0.027)(0.027)(0.027)(0.033)(0.080)(0.082)(0.025)(0.055)(0.042)

2.917

5.875

4.312

4.307

3.623

3.435

3.480

1.064

0.876

0.997

(0.798)(0.516)(0.700)(0.702)(0.364)(0.382)(0.381)(0.551)(0.627)(0.582)

Constant term

Proportional Share of debt
forgiveness / MB
capitalization
Firm (C)AR * MB equity
holdings / MB
capitalization

MB top equity holder among
outsiders-0.010-0.026-0.019(0.156)(0.061)(0.142)

MB equity holding at legal
limit-0.003-0.001-0.001-0.013(-0.463)(0.803)(0.893)(0.345)

MB representative on the
President-0.014-0.014-0.034-0.034-0.010-0.008(0.076)(0.085)(0.022)(0.025)(0.489)(0.567)

0.041

0.040

0.039

0.039

0.043

0.037

0.037

0.036

0.033

0.033

(0.000)(0.000)(0.000)(0.000)(0.008)(0.018)(0.019)(0.018)(0.030)(0.033)

Adjsted-R-squared

0.257

0.236

0.271

0.315

0.113

0.137

0.124

0.090

0.065

0.064

Observations

68

68

68

68

68

68

68

68

68

68

IRCJ support

1) Coefficients and p-values based on t-test are reported in the first row and in parentheses, respectively.

26

Table 8-2: Cross-sectional examination of main bank ARs: Selected events
Sample2003-2004 cases

First news report or formal announcement

AR[0]

AR[0]

Dependet variable
0.003-0.000-0.0000.002-0.008-0.007-0.006-0.005(0.719)(0.969)(0.955)(0.787)(0.224)(0.217)(0.211)(0.366)-0.230-0.212-0.193-0.222-0.148-0.151-0.144-0.148(0.036)(0.041)(0.054)(0.030)(0.050)(0.043)(0.049)(0.046)22.74837.24537.72419.25513.90313.97514.07913.882(0.770)(0.613)(0.605)(0.792)(0.261)(0.253)(0.245)(0.256)

Constant term

Proportional share of debt
forgiveness / MB
capitalization

Firm AR * MB equity
holdings / MB capitalization

MB top equity holder among
outsiders-0.020-0.001(0.121)(0.813)

MB equity holding at legal
limit-0.025-0.019-0.005-0.004(0.082)(0.181)(0.485)(0.619)MB representative on
President-0.027-0.022-0.009-0.008(0.064)(0.141)(0.277)(0.336)

0.047

0.046

0.044

0.047

0.044

0.044

0.044

0.043

(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)Adjsted-R-squared

0.324

0.339

0.348

0.368

0.301

0.309

0.320

0.308

Observations

33

33

33

33

48

48

48

48

IRCJ support

1) Coefficients and p-values based on t-test are reported in the first row and in parentheses, respectively.

27

Figure 1: Amount of Risk Management Loans in Japan

Billion yen
30,00010.0%
9.0%

25,0008.0%
7.0%
20,0006.0%
15,0005.0%
4.0%

10,000
3.0%
2.0%
5,000
1.0%
0

0.0%

March 2000

March 2001

March 2002

March 2003

March 2004

March 2005

March 2006

Total Amount of Risk Management Loans (Major banks)

Total Amount of Risk Management Loans (Regional banks)

Share to Total Loans (Major banks)

Share to Total Loans (Regional banks)

28

Figure 2: Cumulative Abnormal Returns of Japanese Banking Sector (From July 1, 2002 to March 31, 2005)
CAR of Topix Banks ETF (TSE, code:1615)

CAR (benchmarck:TOPIX）
45.0%

Daiei and Misawa announced to
be under the IRCJ supports(Dec.28, 2004)

Annoucement of the first firms
under the IRCJ supports(Aug.28,2003)

35.0%
Anti-Deflation Package andFinancial Revitalization
Program (Oct.30,2002)

25.0%

IRCJ began its operations(May 8,2003)

15.0%

5.0%

-5.0%

-15.0%

07

05

08

10

10

15

16

16

14

19

17

16

17

15

19

18

20

24

23

25

08

09

10

11

12

01

02

03

04

05

06

07

08

09

10

11

12

01

02

03

03

03

03

03

03

04

04

04

04

04

04

04

04

04

04

04

04

05

05

05

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

05
03

20

20

04
03

20

09

03
03

20

08

08

09

02
03

20

20

07

01
03

20

06

06

05

11
02

20

07

29

10
02

20

03

30

09
02

20

03

28

30

08
02

20

20

30
07

02
20

20

01
07
02
20

-25.0%

Trading day

29

Figure 3: Main bank burdens in the ordinary cases
Main-bank share of burdens
Misawa Home

Tomen (2)100%

Sojitsu

80%

Tomen (1)Kanematsu
Mitsubishi Motors
Chori

Shokusan Jutaku Sogo
Kumagai Gumi (2)Araigumi*Nippon Yakin Kogyo
Daisue Construction*Toyo Shutter
Towa Real Estate (2)Isuzu Motors
Nakano Corporation
Pasco
Towa Real Estate (1)DaikyoChuo Paperboard
Toyo Construction

Sumitomo
Constuction

60%
Fujita40%

SuzutanKenwood*IwatayaSampei Construction*Sata Construction*Seibu Departiment Store
Nissan Diesel
Kumagai Gumi (1)Mitsui Construction
Sato Kogyo
Daiei
Hazama Tobishima

Aoki Corporation
Haseko (2)Haseko (1)20%Main-bank share of borrowing
0%
0%

10%

20%

Construction (19 cases)

30%

40%

Real Estate (3 cases)

50%
Retailers (4 cases)

Manufactures and others (8 cases)

45 degree line

30

60%

70%

80%

Wholesellers (5 cases)

90%

Figure 4: Main bank burdens in the IRCJ-support cases
Main bank share of burdens
100%
Dia Construction

80%
DaikyoMisawa Homes HD

60%
Mitsui MiningCompany
Daiei
Kanebo40%

Kinmon Manufacturing
Taiho Industries

20%
Kyushu Industrial Transportation

Main bank share of borrwowing
0%
0%

10%

20%

30%

40%
IRCJ-support cases (9 cases)

31

50%

60%
45 degree line

70%

80%

90%

-0.100032
Arai-Gumi

Chronological order of the formal annoucement of debt forgivenessMisawa Homes HD(2)Daiei(2)Daikyo(2)Taiho Industries

KaneboKimmon Manufacturing

Mitsui Mining

2003-2004 cases

Dia Kensetsu

Kyushu Industrial

Sojitz HD

Mitsubishi Motors

Sata Construction

Sampei Construction

Nakano Corporation

SuzutanNissan Diesel

Toyo Construction

Tobishima

Kumagai-Gumi(2)ChoriSeibu Department

Tomen(2)Towa Real Estate(2)Kenwood

Nippon Yakin Kogyo

First news report

Isuzu Motors

Daikyo(1)Sumitomo Construction

Toyo Shutter

Misawa Homes(1)Iwataya

Haseko(2)Abnormal Returns (AR[0])Daiei(1)

Mitsui Construction

Daisue Construction

Kumagai-Gumi(1)HazamaTomen(1)Kanematsu

Chuo Paperboard

Pasco

Sato Kogyou

Towa Real Estate(1)Shokusan Jutaku Sogo

FujitaHaseko(1)Aoki Corporation

Figure 5: Main bank's Abnormal returns at the event day of announcement of debt forgivenessFormal announcement of the plan

0.1000
IRCJ-support cases

0.05000.0000-0.0500