Corporate Affiliations and the (Mis)Allocation of Credit

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Abstract
The strong corporate affiliations in Japan have been cited as one of the major impediments to making the fundamental changes necessary to escape the economic malaise that has afflicted the Japanese economy over the past decade. While Japanese corporate affiliations during good economic times were heralded as an effective way to increase credit availability and reduce agency costs, during difficult economic circumstances these same affiliations may impede needed economic restructuring, insofar as they insulate firms from the market discipline that otherwise would be imposed by creditors. This study shows that corporate affiliations have contributed to significant misallocations of credit, since troubled borrowers with strong corporate affiliations with their lenders are more likely to obtain additional credit than their healthier brethren. In contrast, lenders that are not affiliated with the firm are less likely to extend additional credit as firms become more troubled.