Japanese corporate leverage during the Lost Decades

Abstract

Japan's Lost Decades (失われた20年) present a unique opportunity to study firm behavior during a period of prolonged economic distress. This paper demonstrates that lessons learnt in “normal” conditions apply to firms in economies in extremis. Japanese firms relied on internally generated funds and precautionary cash holdings to reduce their debt. We document considerable growth in nearly-all-equity firms: 7.5% in 1990 to 28.3% in 2014. We also document that Japan's Lost Decades are associated with firms having low market-to-book ratios. Firms' leverage is lower, however, only when market-to-book values are unequivocally high.