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Empirical studies in corporate finance have long been focused on the role of banks in reducing the costs of financial distress. The environment and events in Japan provide a "Natural experiment" that allows such empirical studies. The number of bankruptcies steadily increased throughout the 1990s, and peaked in 2000. During this period, Japan's banking sector, in contrast, faced considerable problems regarding the disposal of their bad loans. The purpose of this paper is to investigate how various measures of bank health and how defaults of major trading partners affected the probability of bankruptcy among medium-size firms in Japan. Using probit models, the authors examine the causes of bankruptcy for unlisted Japanese companies in the late 1990s and early 2000s.
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