Kaoru Hosono

Abstract This study examines the effects of the interaction of a size-dependent tax policy that exempts firms whose stated capital is at or below a certain threshold from taxation and financial frictions on firm growth and financing. Our empirical findings can be summarized as follows: First, firms with lower productivity, a positive potential tax benefit, and smaller stated capital are more likely to conduct the cash-out capital reduction to or below the threshold in response to the policy. Second, this capital reduction causes ex-post lower firm growth and fewer debt. Third, such causal effects are observed for firms with less cash flow ratios. These results indicate that the interaction between a size-dependent tax policy and financial constraints deters firm growth. Plain English Summary The interaction of a size-dependent tax policy that exempts firms whose stated capital is at or below a certain threshold from taxation and financial frictions deters firm growth. We use the introduction of the pro forma standard taxation system in Japan that exempts firms (SMEs), whose stated capital is at or below a threshold, from taxation to empirically examine how firms react to this institutional change and how such a reaction systematically affects their financing and real outcomes. We show that size-dependent tax policies can have a significant effect on firms’ growth and financing through financial constraints. It indicates that firms decide whether to obtain an SME status by considering the trade-off between a more severe borrowing constraint and a smaller tax payment. The results obtained in this study indicate that such indirect effects of a size-dependent tax policy on firm dynamics should be considered when designing the policy. Moreover, governments should understand that an institutional change in their tax systems generates a heterogeneous reaction from firms and thus has heterogeneous effects on their dynamics.

Abstract We estimate the causal effects of a tax incentive for specific productivity-enhancing equipment introduced in 2014 for Japanese small and medium-sized enterprises (SMEs). Using firm-level panel data, we find, first, that the introduction of the tax incentive did not on average increase the capital investment rate of SMEs eligible for the tax incentive possibly due to the small number of firms using the incentive. Second, despite this finding, the firms using the tax incentive increased their capital investment rate and improved labor productivity more than the comparable firms holding the stated capital close to but more than the criterion of SMEs did. Third, firms using the tax incentive did not increase capital intensity. Fourth, more financially constrained firms using the tax incentive increased their capital investment rate to a greater degree. These results show that the use of the tax incentive mitigates financial constraints in upgrading capital.

Using Japanese firm-level panel data spanning from 2000 to 2013, we estimate industry-level production functions that explicitly take into account the complementarity and substitutability between tangible and intangible capital. The estimation results show that tangible and intangible capitals are complementary in most industries although the degree of complementarity substantially varies across industries. We further find that the relation between tangible and intangible capital in the production function accounts for the relation between firm-level tangible capital and intangible capital investments. Namely, firms’ tangible investments are more strongly positively associated with intangible investments as the degree of the complementarity between the tangible and intangible assets becomes larger. These findings show the necessity to take into account the relation between the dynamics of tangible and intangible capital in terms of their complementarity for precisely understanding the mechanisms governing a firm’s growth.

This article investigates the effect of banks' lending capacity on firms' investment. To identify exogenous shocks to loan supply, we utilize the natural experiment provided by Japan's Great Hanshin-Awaji earthquake in 1995. Using a unique data set that allows us to identify firms and banks in the earthquake-affected areas, we find that the investment ratio of firms located outside the earthquake-affected areas but having a main bank inside the areas was significantly smaller than that of firms located outside the areas and having a main bank outside the areas. Our findings suggest that loan supply shocks affect firm investment.

We investigate the international transmission of the 2007-2009 financial crisis to Japanese firms by examining both stock returns and changes in operating performance during the crisis. Our results indicate that Japanese firms were affected by the crisis mainly through the trade channel in both stock returns and changes in operating performance. We also find that the liquidity channel played a role in the fall of stock returns in response to the crisis and in the changes in return on assets during the first year of the crisis. We obtain weak evidence for the credit crunch channel and no evidence to support the trade finance channel.

In this paper, we investigate Whether financial shocks to firms affect their probability of bankruptcy. We also examine whether these shocks affect the natural selection of the firms, whereby more efficient firms are less likely to go bankrupt. By using the data on the bankruptcy of firms after the Great Tohoku Earthquake, we examine the impact of the damage to lender banks on the firms' probability of bankruptcy. To extract the impact of purely exogenous financial shocks on bankruptcy, we focus on firms located outside the earthquake-affected area but that transact with banks located inside the area. Our findings somewhat counterintuitively suggest that a damaged bank reduces the probability of bankruptcy and weakens the natural selection of firms. We further examine the impact of the injection of public capital into damaged banks and obtain some evidence that the injection reduces the probability of the bankruptcy of their borrowers and weakens the natural selection. (C) 2015 Elsevier B.V. All rights reserved.

This paper investigates fiscal sustainability of Japan by providing a dynamic stochastic general equilibrium (DSGE) model that features the low interest rate of the government bond relative to the economic growth rate to mimic the actual data. We evaluate fiscal sustainability by investigating whether the expected path of the debt-to-GDP ratio stabilizes or increases without bound. The debt-to-GDP ratio depends crucially on the projected growth rate and the fiscal policy rule. If the government does not react to the current fiscal crisis, the debt-to-GDP ratio will increase without bound, and then the fiscal policy is not sustainable. If the fiscal rule uses Bohn's (1998) idea that involves the response of the primary surplus to the debt, sustainability improves. This rule provides a useful and realistic reform plan in the short and long runs. J. Japanese Int. Economies 25 (4) (2011) 434-446. Keio University, Mita 2-15-45, Minato-ku, Tokyo 108-8345, Japan; Gakushuin University, Mejiro 1-5-1, Toshima-ku, Tokyo 171-8588, Japan. (C) 2011 Elsevier Inc. All rights reserved.

The purpose of this paper is to investigate the fiscal sustainability of Japan by applying a dynamic stochastic general equilibrium model to the Japanese economy. By introducing intermediation costs into the model, we succeed in explaining the observed relationship between the interest and GDP growth rates, which is crucial in testing for sustainability. When the projected real growth rate is 2.5%, the average real interest rate becomes 2.57%, and the debt-to-GDP ratio gradually increases stochastically so that government debt is not sustainable. To recover sustainability, the primary surplus must be 0.2% of GDP.

This paper empirically investigates how ownership structure of Japanese firms affects the risk-return profiles of their stocks. We find significant relationships between ownership and firms' operational performance, i.e., the ownership of financial institutions is associated with poor performance while the ownership of large shareholders is associated with the opposite. However, comparing the returns on portfolios sorted by ownership, we find no significant relationships between ownership and the rates of returns. Specifically, excess returns are insignificant after controlling for three risk factors (i.e., market, size, and value) while factor loadings are significantly different across portfolios, i.e., the ownership of financial institutions is associated with low-risk, low-return portfolios while the ownership of large shareholders is associated with the opposite.

We examine how banks' responses to monetary policy vary according to their balance sheet using Japanese bank data from 1975 to 1999. We find that the effect of monetary policy on lending is stronger for banks that are smaller, less liquid, and more abundant with capital. The effects of bank balance sheet on monetary transmission are different by bank types, policy stances and borrowers' industries. Our results imply that a lending channel of monetary transmission exists, that the effect of expansionary monetary policy is attenuated if banks' capital is scarce, and that the effect of monetary policy on the allocation of funds depends on banks' balance sheets.

We explore the determinants of debt structure by analyzing the Japanese machine manufacturing firms' data from 1990 through 1996. We find that firms with abundant growth opportunities and scarce collateral are likely to borrow from banks rather than to issue bonds. This is robust even if we consider the simultaneous decision of the debt composition and leverage or managerial incentive. We also find that firms with abundant growth opportunities or collateral tend to depend on equity rather than on debt. Though banks reduce the agency costs of debt for growing firms, equity costs less than bank loans for them. (C) 2002 Elsevier B.V. All rights reserved.