The effects of the financing facilitation act after the global financial crisis: Has the easing of repayment conditions revived underperforming firms?

Yamori, Nobuyoshi Article The effects of the financing facilitation act after the global financial crisis: Has the easing of repayment conditions revived underperforming firms? Journal of Risk and Financial Management Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Yamori, Nobuyoshi (2019) : The effects of the financing facilitation act after the global financial crisis: Has the easing of repayment conditions revived underperforming firms?, Journal of Risk and Financial Management, ISSN 1911-8074, MDPI, Basel, Vol. 12, Iss. 2, pp. 1-17, https://doi.org/10.3390/jrfm12020063 This Version is available at: https://hdl.handle.net/10419/238994 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Journal of Risk and Financial Management Article The Effects of the Financing Facilitation Act after the Global Financial Crisis: Has the Easing of Repayment Conditions Revived Underperforming Firms? Nobuyoshi Yamori 1,2 1Research Institute for Economics and Business Administration, Kobe University, Kobe 457-8501, Japan; [email protected] 2Research Institute of Economy, Trade and Industry, Tokyo 100-0013, Japan Received: 26 January 2019; Accepted: 10 April 2019; Published: 15 April 2019   Abstract: After the global financial crisis, the Japanese government enacted the Financing Facilitation Act in 2009 to help small and medium-sized enterprises (SMEs) that had fallen into unprofitable conditions. Under this law, when troubled debtors asked financial institutions to ease repayment conditions (e.g., extend repayment periods or bring down interest rates), the institution would have the obligation to meet such needs as best as possible. Afterward, the changing of loan conditions began to be utilized often in Japan as a means for supporting underperforming companies. Although many countries employed various countermeasures against the global financial crisis, the Financing Facilitation Act was unique to Japan. However, there is criticism that it did not become an opportunity for companies to substantially reform their businesses, and that there was a moral hazard on the company’s side. This paper analyses whether the easing of repayment conditions revived underperforming firms and who were likely to recover, by using the “Financial Field Study After the End of the Financing Facilitation Act”, carried out by the Research Institute of Economy, Trade and Industry (RIETI) in Oct 2014. We found that the act was successful in that about 60% of companies whose loan conditions were changed recovered their performance after the loan condition changed, and the attitude that financial institutions had towards support was an important factor in whether performance recovered or not. In sum, the act might be effectual when financial institutions properly support firms, although previous studies tend to emphasize its problems. Keywords: financing facilitation act; business improvement; business support; regional financial institutions; business revitalization 1. Introduction Due to the global financial crisis, many Japanese companies fell into difficulties and had trouble repaying debts. Accordingly, the Japanese government enacted “the Act on temporary measures to facilitate financing for small and medium-sized enterprises” (hereafter, the SME Financing Facilitation Act) in 2009. Under this law, when debtors asked financial institutions to ease repayment conditions (e.g., extend repayment periods or bring down interest rates), the institution would have an obligation to meet such needs as best as possible1. After the law was enacted, it was said that financial institutions were very flexible in complying to the changing of conditions. However, because financial institutions were lightly complying to the 1 Yamori et al. (2013) discussed the various countermeasures that the Japanese government employed to tackle against the negative impacts of the global financial crisis. J. Risk Financial Manag. 2019,12, 63; doi:10.3390/jrfm12020063 www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2019,12, 63 2 of 17 request for changing loan conditions and were not making serious efforts to support revitalization, there is criticism that it did not become an opportunity for companies to substantially reform their businesses, and that there was moral hazard on the company’s side (e.g., Hoshi 2011;Harada et al. 2015;Imai 2019). That is, companies that were allowed to change loan terms were likely to feel that financing could be managed in the short-term, and so they did not work towards reforms in earnest. This paper uses the “Financial Field Study After the End of the Financing Facilitation Act” carried out by the “Study Group on Corporate Finance and Firm Dynamics” of the Research Institute of Economy, Trade and Industry (RIETI), to analyze whether the performance of companies is recovering after changes to repayment conditions. It also looks at what kind of differences there are between companies that are recovering and those that are not. As explained later, the survey was very unique in that it included many firms that requested loan condition changes. We found that about 60% of companies whose loan conditions were changed recovered their performance after the loan condition changed. Also, we found that the attitude of financial institutions towards support was a major factor in whether firms could recover after loan condition changes. Although previous studies negatively evaluated the act, our finding suggests that the act may be effectual if financial institutions make an effort to support troubled firms. Although this kind of policy was unique to Japan during the global financial crisis, all nations will be able to employ it to cope with a future crisis in a wisely manner. The structure of this paper is as follows: Section 2will explain the impacts of the global financial crisis on Japanese firms and what the Financing Facilitation Act was. Section 3provides the literature review. Section 4will introduce an outline of the “Financial Field Study after the End of the Financing Facilitation Act”, which is used in this study. Section 5will analyze how much companies recovered their performance after they received changes to their repayment conditions and what kind of factors caused this. Finally, Section 6will present the conclusions of this paper. 2. The Global Financial Crisis and the Financing Facilitation Act 2.1. Impacts of the Global Financial Crisis on Japanese Small and Medium-Sized Enterprises (SMEs) The global financial crisis severely hit Japanese firms. Figure 1shows how business conditions of Japanese firms deteriorated during the global financial crisis, irrespective of their size. For example, business conditions diffusion index (BCDI) for large firms was 23 in March 2007 and decreased to − 45 in March 2009. The index for small firms decreased from 0 to −47 during the same period. J. Risk Financial Manag. 2019, 12, x FOR PEER REVIEW 3 of 20 Figure 1 Business conditions diffusion index (All industries)1 77 78 1 Business conditions diffusion index is defined as the difference between the ratios of those who 79 choose business condition is good and those who choose business condition is bad. 80 Source: Bank of Japan’s Tankan survey (Quarterly survey of business sentiment). 81 82 83 Also, as shown in Figure 2, during the global financial crisis, funding conditions of firms 84 significantly deteriorated. Funding conditions diffusion index (FCDI) for large firms was 21 in 85 March 2007 and decreased to -4 in March 2009, while the index for small firms decreased from -2 to 86 -23 for the same period. 87 To accommodate the difficulties that firms faced, the Japanese government introduced various 88 supportive measures (Bank of Japan 2010; Yamori et al. 2013; Harada et al. 2015). The Financing 89 Facilitation Act, which is the main topic of this paper, was unique to Japan and negatively criticized . 90 91 92 Figure 1. Business conditions diffusion index (All industries). Business conditions diffusion index is defined as the difference between the ratios of those who choose business conditions as good and those who choose business conditions as bad. Source: Bank of Japan’s Tankan survey (Quarterly survey of business sentiment). J. Risk Financial Manag. 2019,12, 63 3 of 17 Also, as shown in Figure 2, during the global financial crisis, funding conditions of firms significantly deteriorated. Funding conditions diffusion index (FCDI) for large firms was 21 in March 2007 and decreased to − 4 in March 2009, while the index for small firms decreased from − 2 to − 23 for the same period. J. Risk Financial Manag. 2019, 12, x FOR PEER REVIEW 4 of 20 Figure 2 Funding conditions diffusion index (All industries)1 93 94 1 Funding conditions diffusion index is defined as the difference between the ratios of those who 95 choose funding condition is good and those who choose funding condition is bad. 96 Source: Bank of Japan’s Tankan survey (Quarterly survey of business sentiment). 97 98 2.2 The SME Financing Facilitation Act 99 In November 2009, the SME Financing Facilitation Act was passed. According to the Financial 100 Services Agency (FSA), the act had the following contents2. First, when requested by an SME or a 101 residential mortgage borrower to ease debt burden, financial institutions, such as banks, Shinkin 102 banks, and credit cooperatives, strive to revise the loan terms, etc. Second, financial institutions are 103 obliged to (i) develop internal systems for fulfilling the above responsibilities of financial 104 institutions, (ii) disclose information on implementation of the responsibilities of financial 105 institutions and the development of internal systems. Third, financial institutions are obliged to 106 report the information on their implementation to the supervising agencies. False statements in the 107 report are subject to criminal penalty. Fourth, the authority will summarize the reports from 108 financial institutions and publish the summary on regular basis. 109 2 See the FSA’s document at https://www.fsa.go.jp/en/refer/diet/173/01.pdf. (accessed on March 27, 2019). Technically, as Kitazawa et al. (2010) summarized the contents of the act as follows. The Act requires "Financial Institutions" to do the following: (a) As a "best efforts" requirement, (i) to endeavor to provide new credit to small and medium sized businesses and (ii) to endeavor to take steps to alleviate the burden of debt, upon receipt of a request for the postponement of repayment of debt by a small and medium sized business or a borrower of residential housing loan; and (b) As a "legal obligation", (iii) to establish a framework to give effect to the steps described in (ii) above, and (iv) to disclose and report to the authorities steps taken in connection with (ii) and (iii) above. Figure 2. Funding conditions diffusion index (All industries). Funding conditions diffusion index is defined as the difference between the ratios of those who choose funding conditions as good and those who choose funding conditions as bad. Source: Bank of Japan’s Tankan survey (Quarterly survey of business sentiment). To accommodate the difficulties that firms faced, the Japanese government introduced various supportive measures (Bank of Japan 2010;Yamori et al. 2013;Harada et al. 2015). The Financing Facilitation Act, which is the main topic of this paper, was unique to Japan and was negatively criticized. 2.2. The SME Financing Facilitation Act In November 2009, the SME Financing Facilitation Act was passed. According to the Financial Services Agency (FSA), the act had the following contents 2 . First, when requested by an SME or a residential mortgage borrower to ease debt burden, financial institutions such as banks, Shinkin banks, and credit cooperatives strived to revise the loan terms, etc. Second, financial institutions were obliged to (i) develop internal systems for fulfilling the above responsibilities of financial institutions, and (ii) disclose information on implementation of the responsibilities of financial institutions and the development of internal systems. Third, financial institutions were obliged to report information on their implementation to supervising agencies. False statements in the report were subject to criminal penalty. Fourth, authorities summarized the reports from financial institutions and published the summary on regular basis. At the same time, the Financial Supervisory Agency amended the Supervisory Guidelines. As pointed out by Harada et al. (2015), the important amendment was that banks could exclude the 2 See the FSA’s document at https://www.fsa.go.jp/en/refer/diet/173/01.pdf (accessed on 27 March 2019). Technically, as Kitazawa et al. (2010) summarized the contents of the act as follows. The Act requires “Financial Institutions” to do the following: (a) As a “best efforts” requirement, (i) to endeavor to provide new credit to small and medium sized businesses and (ii) to endeavor to take steps to alleviate the burden of debt, upon receipt of a request for the postponement of repayment of debt by a small and medium sized business or a borrower of residential housing loan; and (b) As a “legal obligation”, (iii) to establish a framework to give effect to the steps described in (ii) above, and (iv) to disclose and report to the authorities steps taken in connection with (ii) and (iii) above. J. Risk Financial Manag. 2019,12, 63 4 of 17 restructured SME loans from non-performing loans if they planned to come up with restructuring plans that were expected to make the loans perform in five years from the time they specified the plan. In sum, the act encouraged banks to roll over loans to troubled SME borrowers when they were asked 3 . Although there was no penalty provision when banks did not follow the “best efforts” requirement, almost all requests by troubled SMEs for loan restructurings were admitted. Figure 3shows the number of requests by SMEs to change loan conditions and the number of those that were accepted by banks. The acceptance rate was 94.8% for the period from April 2010 to March 2011. The act was originally set to expire at the end of March 2011, but it was extended twice before finally expiring at the end of March 2013. Therefore, as explained below, our survey was conducted after the expiration of the Financing Facilitation Act. The acceptance rates continued to exceed 95% after April 2013. Namely, Japanese banks are likely to accept requests of troubled SMEs to change loan conditions easily, even though the law formally expired. J. Risk Financial Manag. 2019, 12, x FOR PEER REVIEW 4 of 17 plans that were expected to make the loans perform in five years from the time they specified the plan. In sum, the act encouraged banks to roll over loans to troubled SME borrowers when they were asked3. Although there was no penalty provision when banks did not follow the “best efforts” requirement, almost all requests by troubled SMEs for loan restructurings were admitted. Figure 3 shows the number of requests by SMEs to change loan conditions and the number of those that were accepted by banks. The acceptance rate was 94.8% for the period from April 2010 to March 2011. The act was originally set to expire at the end of March 2011, but it was extended twice before finally expiring at the end of March 2013. Therefore, as explained below, our survey was conducted after the expiration of the Financing Facilitation Act. The acceptance rates continued to exceed 95% after April 2013. Namely, Japanese banks are likely to accept requests of troubled SMEs to change loan conditions easily, even though the law formally expired. Figure 3. Number of requests by small and medium-sized enterprises (SMEs) and acceptance by banks. This figure shows the number of requests by SMEs to restructure their loans and the number of those that were accepted by banks during each fiscal year. Source: Financial Services Agency of Japan (2018). 3. Literature Review 3.1. Impacts of the Global Financial Crisis on SMEs How governments around the world have responded to the crises and how their responses affected the performance of small firms is relevant to academics and policy-makers. The impacts of the global financial crisis on non-financial firms have been investigated actively. Claessens et al. (2012) conducted cross-country analyses covering 42 countries and found that the crisis had a bigger negative impact on firms with greater sensitivity to demand and trade, particularly in countries more open to trade4. Kremp and Sevestre (2013) investigated French SMEs after the global financial crisis. They found that French SMEs did not appear to have been strongly 3 Act. To have an image of the actual responses of banks, see the announcement about its response to the act released by Aozora bank, as an example. http://www.aozorabank.co.jp/english/about/newsrelease/2010/pdf/10020102_n.pdf 4 Chava and Purnanandam (2011), focusing on not the global financial crisis, but the Russian crisis of Fall 1998, analyzed how the banking sector’s financial health affected bank-dependent borrowers’ performance in the United States. Based on the event-study approach, they found that firms with higher growth opportunities and lower financial flexibility suffered larger value losses. 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 April 2010- March 2011 April 2011- March 2012 April 2012- March 2013 April 2013- March 2014 April 2014- March 2015 April 2015- March 2016 April 2016- March 2017 April 2017- March 2018 number of requests number of acceptance Figure 3. Number of requests by small and medium-sized enterprises (SMEs) and acceptance by banks. This figure shows the number of requests by SMEs to restructure their loans and the number of those that were accepted by banks during each fiscal year. Source: Financial Services Agency of Japan (2018). 3. Literature Review 3.1. Impacts of the Global Financial Crisis on SMEs How governments around the world have responded to the crises and how their responses affected the performance of small firms is relevant to academics and policy-makers. The impacts of the global financial crisis on non-financial firms have been investigated actively. Claessens et al. (2012) conducted cross-country analyses covering 42 countries and found that the crisis had a bigger negative impact on firms with greater sensitivity to demand and trade, particularly in countries more open to trade 4 .Kremp and Sevestre (2013) investigated French SMEs after the global financial crisis. They found that French SMEs did not appear to have been strongly affected by credit 3 Act. To have an image of the actual responses of banks, see the announcement about its response to the act released by Aozora bank, as an example. http://www.aozorabank.co.jp/english/about/newsrelease/2010/pdf/10020102_n.pdf. 4 Chava and Purnanandam (2011), focusing on not the global financial crisis, but the Russian crisis of Fall 1998, analyzed how the banking sector’s financial health affected bank-dependent borrowers’ performance in the United States. Based on the event-study approach, they found that firms with higher growth opportunities and lower financial flexibility suffered larger value losses. J. Risk Financial Manag. 2019,12, 63 5 of 17 rationing since 2008. Zhao and Jones-Evans (2017) analyzed the impacts of the global financial crisis on SMEs in the UK. There are several papers investigating the impacts of the global financial crisis on Japanese SMEs. Yamada et al. (2018) used 764,963 SME observations in Japan and analyzed how the global financial crisis related to the investment and financial decision-making for SMEs. They found that the effects were different among SMEs. For example, firms without debt increased their investments during the crisis period, while SMEs with a high amount of debt at the pre-crisis period additionally borrowed more money from financial institutions but did not use it for investment. Ogawa and Tanaka (2013) used data from a unique survey that was conducted by the Research Institute of Economy, Trade and Industry (RIETI) in 2008 and 2009. They found that the bank-dependent SMEs asked their closely-affiliated financial institutions for help, while the SMEs that were less dependent on financial institutions sought help primarily from their suppliers. 3.2. Literature Relating to the Financing Facilitation Act Harada et al. (2015) attempted to evaluate the financial regulatory responses (i.e., Basel III, stress tests, over-the-counter derivatives regulation, recovery and resolution planning, and banking policy for SME lending) by the Japanese government after the global financial crisis. They critically argued about the Financing Facilitation Act, because the act enabled troubled SMEs to ask for loan restructuring and banks to grant loan restructuring for almost all who asked. In other words, the act allowed the so-called zombie firms to survive 5 . They pointed out that relaxation of bank supervision in conjunction with the act allowed banks not to report these loans as non-performing loans. Furthermore, Imai (2016) showed that zombie firms were prevalent amongst small and medium-sized firms, and that their investment projects were not as productive as non-zombie firms. Based on these findings, Imai (2019) concluded that it was safe to say that the Japanese government’s forbearance policy benefitted weak banks and their unviable borrowers at the expense of the public. Following this context, Imai (2019) regarded the Financing Facilitation Act (which they called “the debt moratorium law”) as an example that Japanese government reverted back to the habit of using its discretion to soften prudential banking regulation after the Lehman shock. Imai (2019) pointed out “the debt moratorium law might have mitigated credit crunch for SMEs”, but the law “has again created a regulatory environment in which zombie firms tend to thrive, just as the forbearance policy did in the 1990s”. In sum, these previous studies emphasized its problems. However, as the act surely mitigated the negative impacts of the crisis on SMEs, it seems useful to investigate how to enjoy its benefits while avoiding its negative effects. As far as we know, there are few studies that are focusing on the positive side of the Financing Facilitation Act and consider how to use it wisely. 4. An Outline of the Financial Field Study after the End of the Financing Facilitation Act Recently, many SMEs studies have obtained data through surveys (e.g., Uchida et al. 2008,2012; Ogawa and Tanaka 2013;Wang 2016;Xiang and Worthington 2017). For example, Kraus et al. (2012) used survey data gathered from 164 Dutch SMEs and investigated how entrepreneurial orientation affected the performance of SMEs during the global financial crisis. Research using questionnaire data is increasing because macroeconomic data alone cannot provide sufficient analysis. First of all, small and medium-sized enterprises are diverse, and the impact of shock varies by company. Policy responses need to be tailored to the conditions of each company, which requires an analysis that reflects the attributes of various SMEs. Second, in order to understand the behavior of SMEs, it is necessary to 5 During the banking crisis in the late 1990s, many Japanese banks continued to lend to so-called zombie firms to keep their loans current (e.g., Peek and Rosengren 2005). This evergreen lending hid banks’ non-preforming loan problems. Caballero et al. (2008) argued that zombie firms that were given credit in favorable terms discouraged rival productive firms. J. Risk Financial Manag. 2019,12, 63 6 of 17 take into consideration not only quantitative data such as sales and profits but also subjective factors such as anxiety about business conditions and funding. Therefore, survey data analyses are valuable in understanding the merits and demerits of the Financing Facilitation Act. Fortunately, the author is a faculty fellow of the Research Institute of Economy, Trade and Industry (RIETI) and can access the dataset that was developed by the RIETI. We can use in this paper the “Financial Field Study after the End of the Financing Facilitation Act”. This study was carried out from October to November 2014 by the RIETI6. The survey sample used by the study was an extract from the Tokyo Shoko Research (TSR) database of 20,000 small and medium enterprises that existed as of both December 2009 and October 2014, the latter being when sample extraction work was conducted. Specifically, it consisted of the following three samples. The first sample had the objective of gathering together “treatment companies” that received changes in loan conditions along with the enforcement of the Financing Facilitation Act. Tokyo Shoko Research (TSR), a major Tokyo-based credit research company, delivers credit reports on a wide range of SMEs, and we found that the reports of 4087 enterprises included the keywords “condition changes” or “facilitation act”. As these firms were likely to apply for the changes in loan conditions, we included them in our sample. The second sample had the objective of gathering together “control companies” as opposed to “treatment companies”, and consisted of 5207 companies that answered the survey of “The FY2007 Field Study of Transactions with Companies and Financial Institutions” carried out by the RIETI in February 2008 7 . They were included because they were expected to respond to our survey with a high probability. The third sample had the objective of gathering additional “treatment companies” and consisted of 10,706 entries of companies with a TSR creditworthiness grade of 49 and under (in other words, companies with severe business conditions) and that had a distribution of employee numbers similar to the second sample. Upon sending surveys in October 2014 to 20,000 companies selected based on the above standards, valid answers were received from 6002 of them, a response rate of 30.01%. Responses from the first sample numbered 996, with 2537 from the second sample, and 2465 from the third. The average employee number of the companies that responded, as of the time when the Financing Facilitation Act was enforced (December 2009), was 61.33 employees and the median was 24 employees. More specifically, 598 or 10% of companies had “between 1 and 5” employees, 2135 or 36% had “between 6 and 20”, and 1478 or 25% had “between 21 and 50”. Thus, approximately 70% of companies had employee numbers 50 and below. Table 1summarizes the basic statistics of respondents for the latest business year 8 . Average total assets and net-worth were 2478 million yen and 751 million yen, respectively. Average number of employees was 68, which was slightly larger than the figure in December 2009. As shown by the difference between the median and the average, a few very large companies were included in this sample, but most of the sample firms were SMEs, which were generally more vulnerable to economic shocks and more dependent on financial institutions. 6 The data is only available to the researchers as long as the RIETI permits. However, an overall summary of this field study was reported in a paper by Uesugi et al. (2015). Also, in the “2016 White Paper on Small and Medium Enterprises” (Part 2, Chapter 5, Section 2 “Fund-raising environment for enterprises with changed loan conditions”), published by the SME agency of Japanese government, there is an analysis that makes use of the results of this study (See The Small and Medium Enterprise Agency 2016). Additionally, Ono and Yasuda (2017) used the same data. 7Ogawa and Tanaka (2013) used data from this survey. 8 As it is common in Japan that business year starts on April 1 and ends on March 31. So, the latest business year for most firms in this survey is the period from April 2013 to March 2014. J. Risk Financial Manag. 2019,12, 63 7 of 17 Table 1. Descriptive statistics about respondents for the latest business year. 1 Variables Number of Respondents Min Median Max Average SD Total Assets 5412 −29 516 958,662 2478 18,338 Net Worth 5364 −17,928 112 368,750 751 6898 Sales 5576 0 617 786,787 2708 17,378 Operating Income 5458 −11,367 12 121,975 106 1914 Number of Employees 5584 0 24 6926 68 175 1Total Assets, Net Worth, Sales, and Operating Income are listed in millions of yen. 5. Results 5.1. Changes in Loan Condition Changes after the Financing Facilitation Act In the “Financial Field Study after the End of the Financing Facilitation Act” (hereon referred to as “this study”), the following question was asked with five answer options: “Since the Financing Facilitation Act was enforced (December 2009), had changes in loan claim repayment conditions been permitted even once for your company?” Table 2shows the results of this question. Table 2. Changes in loan repayment conditions since the Financing Facilitation Act was enforced. Answer Numbers of Companies Proportion 1. It was permitted at least once 1561 27.8% 2. We applied for it but it wasn’t permitted even once 65 1.2% 3. We wished to apply for it but we didn’t as we thought it wouldn’t be permitted 121 2.2% 4. We wished to apply for it but we didn’t in consideration of bad effects 159 2.8% 5. We didn’t apply for it as we didn’t feel it was necessary 3717 66.1% All companies that answered 5623 100.0% As mentioned before, there were a total of 6002 companies who responded to this study, but those who responded as to whether there were changes to their payment conditions or not were 5621. According to Table 2, the number of those companies that had their condition changes permitted (which are referred to below as Changes-permitted companies) was 1561. On the other hand, 3717 companies answered that “We didn’t apply for it as we didn’t feel it was necessary” (referred to below as Changes-unneeded companies). It is notable that the Changes-permitted companies made up a 28% share, due to the sample gathering method of this study, which did not suggest that about 30% of Japanese firms received loan condition changes during the global financial crisis. 5.2. Changes in Business Performance from the First Changes in Loan Conditions to the Present This study asked about the change in business performance after the first changes to conditions up until the present, using a 5-level answer scheme (from “improved” to “worsened”). Table 3shows these results. Of course, the target for this question was only companies that had condition changes permitted (1561), but 1497 of these firms provided valid answers. Thus, these 1497 companies were the main target of the analysis in this paper, and for reasons of comparison, the results of Changes-unneeded companies were mentioned when necessary. J. Risk Financial Manag. 2019,12, 63 8 of 17 Table 3. Change in business performance after the first changes to loan conditions. 1 Answer Improved Slightly Improved Didn’t Change Slightly Worsened Worsened Total Numbers of Companies 256 629 353 168 91 1497 Proportion 17.1% 42.0% 23.6% 11.2% 6.1% 100.0% 1This result is based on the responses of Changes-permitted companies. Looking at Table 3, “Improved” and “Slightly improved” (both referred to below as the combined term improved trend) took up approximately 60%, while “Slightly worsened” and “Worsened” (both referred to below as the combined term worsened trend) took up just under 20%. Thus, there have been positive developments in business performance after the changes in loan conditions. The loan condition changes are regarded as an effectual measure to support temporarily underperforming firms and to keep them afloat. On the other side, we should pay attention to the fact that around 20% of companies did experience the worsened trend. It is very important to bring down this percentage in order to reduce costs caused by this kind of policy measure in coping with a similar crisis in the future. For this purpose, this study intends to examine the causes of Table 3’s differences in improvement in business performance after conditions were changed. 5.3. An Overview of Companies That Had Their Loan Conditions Changed 5.3.1. Employee Numbers Table 4shows the number of full-time employees by five categories of changes in business performance. The median for companies where performance was “Improved” was 33 people, and “Improved” companies were larger than companies of other performance categories. Table 4. Number of full-time employees (latest accounting period) (unit: people). Answer Changes-Permitted Companies Changes-Unneeded Companies Improved Slightly Improved Didn’t Change Slightly Worsened Worsened 75th percentile 72 46 52 51 36 81 Median 33 20 19 19 15 27 25th percentile 17 9 9 7 5 11 Average 62.0 48.0 46.8 58.5 42.1 78.9 In this study, employee numbers at the time of the condition changes were not inquired about, so we were unable to verify directly how they had grown since the first changes to payment conditions. However, we inquired about both the employee numbers of the latest accounting period and those from two periods before, and so we knew fluctuations in employee numbers through this one-year period. On investigating this, it can be seen that “Improved” companies increased 1.01-fold, “Slightly improved” stayed the same at 1.00-fold, “Didn’t change” decreased 0.98-fold, “Slightly worsened” by 0.95-fold, and “Worsened” by 0.91-fold. In other words, companies with an improved trend increased employees, while companies with a worsened trend had a roughly 10% reduction in staffacross the recent one-year period. 5.3.2. The Current Business States This study asked companies about several aspects of their business states, such as their current business performance and finances, by using a 5-level answer scheme (from “Good” to “Bad”). Here, 5 points were assigned to companies answering “Good”, 4 points was “Slightly good”, 3 points was “Normal”, 2 points was “Slightly bad”, and 1 point was “Bad”. With these calculations, companies with larger numbers were meant to be in better condition. Table 5shows those averages. J. Risk Financial Manag. 2019,12, 63 15 of 17 number of companies that could not improve their performance. Therefore, while we can say that so-called zombie companies were not often rescued by easing loan conditions, we need to strengthen the ability of financial institutions to support underperforming firms. Compared with Changes-unneeded companies, there were many Changes-permitted companies that responded that the loaning attitude of financial institutions was strict. However, as companies that experienced good loaning attitudes from financial institutions tended to respond that their performance became “Improved”, the attitude of financial institutions is an important factor in performance improvement. When we look at the changes in performance by the type of a company’s main bank, companies that do business with governmental financial institutions have less worsened trends, and conversely, companies that do business with major banks and credit unions had fewer replies of “Improved”. It is often pointed out that major banks tend to avoid troublesome support to those with condition changes, and these results back this argument up. On the other hand, in spite that credit unions work at giving such support (despite being troublesome), their “Improved” rate was very low. This result shows that they are lacking in expertise to revitalize businesses. On inquiring about the changes in the attitude of financial institutions after condition changes were permitted, more than 70% of “Improved” companies chose “Supported us empathetically”, while only about 45% of “Worsened” or “Slightly worsened” companies chose it. In contrast, over 30% of worsened trend companies replied “Did not accept new loans of funds”, while less than 20% of “Improved” companies did so. Even if condition changes were received in a similar fashion, the attitude of the financial institution afterward made a big difference. The result also confirms that current support from financial institutions towards worsened companies has been insufficient. On the enforcement of the Financing Facilitation Act, which requires financial institutions to actively agree to change repayment conditions as much as possible, it was strongly criticized that the simple propping up of underperforming companies (so-called “zombie companies”) was nothing more than delaying the problem. Actually, because of this theoretical conjecture, many previous studies criticized the act. However, there may be a positive side, because it mitigated the credit crunches of SMEs. This paper can use the above-mentioned survey data and provide empirical evidence on this matter. This paper found that the ratio of zombie companies overall was small, if any. More important, unless appropriate support for improving business is not provided by financial institutions after changing loan conditions, the chances of improvement is low. In other words, not having appropriate support from financial institutions is what turned underperforming but high-potential companies into zombie companies. In sum, although the Financing Facilitation Act inevitably involves negative side effects, as argued by many researchers, we consider whether negative effects may be mitigated by banks’ behaviors. Our results suggest that the act is not bad in itself, and if it is used properly, it can produce good results. To make banks use it properly, it is necessary for the banking authority to monitor banks’ behaviors closely. All in all, in times of crisis, there is a need to adopt a policy like the Financing Facilitation Act, but in that case the banking authority should do its best to minimize negative effects of the policy measure. Also, continuing such strict banking supervision in normal times is not desirable, as it restricts the behavior of banks. Needless to say, the measure should be abolished as soon as possible, if the situation becomes normal. Lastly, we point out the limitations of this paper. First, in this paper, we only demonstrated the simple relationship between responses. We need to explore causality and multilateral relations. Second, companies that had gone bankrupt after receiving condition changes were not able to be analyzed in this study. This means that companies in this study who replied “Worsened” were actually those that were able to avoid bankruptcy, and it can be regarded that the degree referred to as “Worsened” is not so serious. The negative side of the repayment condition changes may be underestimated. For this, analysis with datasets including information about bankrupt firms will be necessary. J. Risk Financial Manag. 2019,12, 63 16 of 17 Funding: This research was funded by Japan Society for the Promotion of Science, grant number 16H02027 and 17H02533. Acknowledgments: This paper is a part of the results from the “Study Group on Corporate Finance and Firm Dynamics” project (Representative: Iichiro Uesugi, Professor at the Economics Research Institute of Hitotsubashi University) of the Research Institute of Economy, Trade and Industry. The survey used by this paper is the result of cooperative work from the group’s members. I thank the RIETI for allowing me to use the data that is not open to the public. In addition, many beneficial comments about Yamori (2017) were received from members in the study group. I’d like to express my appreciation to them here. Conflicts of Interest: The authors declare no conflict of interest. The Research Institute of Economy, Trade and Industry (RIETI) and the founding sponsors had no role in the design of the study; in the collection, analyses, or interpretation of data; in the writing of the manuscript, or in the decision to publish the results. References Bank of Japan. 2010. 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