There is considerable variation in the number of casualties and the extent of damage across municipalities in the earthquake-affected area.10 The ratio of the number of casualties to the total population and the ratios of the number of completely and partially destroyed housing units to the . Their findings suggest that borrowing restrictions played an important role in the aftermath of the disaster. Although information is not available on how long such disruption of banking operations continued, Table 3 provides an overview of banks headquartered in the earthquake-affected area at the time of the earthquake.
The first alternative is B_HQDAMAGED, a dummy variable that has a value of one if the bank's headquarters are located in the earthquake-affected area. The second alternative is B_BRDAMAGED, which is the proportion of the main bank's branches located in the earthquake-affected area as a fraction of the total number of branches. As shown in Table 6, only 5.9% of all companies and only 7.7% of companies in the affected area changed their main bank in the three years after the earthquake.
On the other hand, the effect of bank damage on damaged borrowers is captured by the sum of the coefficients on B_DAMAGED and on the interaction term B_DAMAGED and F_DAMAGED. As indicators of the financial health and profitability of the main bank, we use the bank's unadjusted risk-to-capital assets ratio (B_CAP) and the ratio of operating profit to total assets (B_ROA). Each panel shows summary statistics for the entire sample; for the sub-sample of damaged firms (F_DAMAGED=1); and for the subsample of undamaged firms (F_DAMAGED=0).
On the other hand, the financial characteristics of the main banks for damaged and undamaged firms are not systematically different.
Regression Results 1 Baseline results
However, this does not necessarily mean that the financial conditions of damaged banks were worse than those of their undamaged peers. This impact is economically significant, as the average investment rate for undamaged firms in fiscal 1995 was 13.1%. For specification (2), where bank damage is represented by damage to branches, the investment ratio of undamaged firms is associated with damaged main banks whose value of B_BRDAMAGED is equal to the sample mean of the undamaged firms (i.e. 7 percentage points) in FY 1996. ratios that were 1.0 percentage points lower compared to companies with undamaged large banks.
An interesting finding is that the timing of the impact of bank damage on firm investment differs between the two specifications. While the negative and significant impact of B_HQDAMAGED on investment of client firms appeared immediately after the earthquake, i.e., in FY1995, the significant impact of B_BRDAMAGED appeared only one year later in FY1996. Note that the effects of bank damage, whether in headquarters or branch networks, are short-lived.
This may imply that damaged banks shifted their loan portfolios from undamaged to damaged firms to aid the damaged firms' recovery, but the result is not strongly significant and is only observed in FY1995. To the extent this is the case, firms associated with a damaged Shinkin bank or credit union may be more severely affected. Note that in this specification we implicitly assume that damage to regional banks, which are relatively large, has no significant impact on their client firms' investment, because these banks are likely to have more diversified loan portfolios than Shinkin banks and credit cooperatives.
That is, the investment rate of undamaged firms affiliated with damaged Shinkin banks or credit unions was lower by 10.0 percentage points than that of undamaged firms affiliated with undamaged (or damaged regional) main banks. These results are consistent with our prediction that firms associated with a damaged small bank are more severely affected than those associated with a damaged large bank. The interaction term for B_HQDAMAGED and SMALL has a positive and significant coefficient in FY1997, but its absolute value is smaller than the coefficient for B_HQDAMAGED in the baseline result, suggesting that the recovery from the period of low investment was weaker for firms affiliated with small banks.
Note that the results for all the other explanatory variables are similar to those in the baseline estimation for both specifications, except that the sum of the coefficients on B_DAMAGED and on the interaction term for F_DAMAGED and B_HQDAMAGED (interacted with SMALL) is not statistically significant. The latter result suggests that the portfolio shift effect observed in the baseline estimate does not exist when we focus only on small banks. So far, we have conducted cross-sectional regressions, based on the assumption that before the earthquake, firms' investments were not significantly different between damaged and undamaged firms.
SCONSTRAINT
However, for the sake of robustness, we try to determine whether controlling for the difference in the pre-earthquake investment ratio among firms changes our results.
DAMAGEDB
DAMAGEDF
HSALESGROWT
Conclusion
Using a unique firm-level data set that allows us to identify firms and banks in the affected area, and combining this data set with bank-firm relationship and financial statement information, we examined the impact of a transactional relationship with a bank in the affected area . had on the post-earthquake investments of client companies that were not themselves directly affected by the earthquake. We found that the investment share of firms located outside the earthquake-affected area but with a main bank within the area was lower than that of firms whose main bank was outside the affected area. This difference in the timing of the effects suggests that there are two different channels through which damage to banks affected client firms: through the weakening of banks' managerial ability to issue loans and through the weakening of their risk-taking capacity.
Wolfenzon., 2011, Dissecting the effect of credit supply on trade: Evidence from matched credit-export data. Collateral Damage: Effects of the Japanese Banking Crisis on Real Activity in the United States. Evidence from the Great Hanshin-Awaji (Kobe) Earthquake, Journal of Money, Credit, and Banking 40, p.
Note: "Regions outside the Designated Area" refers to regions located in Hyogo and Osaka Prefectures but not included in the Law on Special Financial Assistance for Dealing with a Designated Disaster of Extreme Severity. One of the cities has since been merged into Sumoto City, while the other four have been merged into Awaji City. The table includes all cities and towns in Hyogo Prefecture, as well as some in Osaka Prefecture (for a total of nine cities and five villages in the two prefectures combined), which were included in the Law on Special Financial Assistance for Dealing with a designated disaster of extreme severity. To calculate the ratio of the number of victims to the total population and the ratio of the number of completely and partially destroyed housing units to the total number of housing units, we used data from the 1990 census (Ministry of the Interior). Affairs and Communications, Government of Japan) and the Housing and Land Survey 1993 (Ministry of Construction).
Shinkin banks (shinyo kinko in Japanese) and credit cooperatives (shinyo kumiai in Japanese) are small credit unions. The area affected by the earthquake includes 8 cities and 5 towns (among them Kobe City itself) in Hyogo Prefecture and 1 city (Toyonaka City) in Osaka Prefecture. Note: F_INVESTMENTRATIO is the ratio of capital investments of firms to fixed assets lagged one period, F_SALESGROWK is the growth rate of firms' sales, F_LNASSETis the natural logarithm of total assets of firms, F_LEVis the ratio of firms' liabilities, the ratio of firms' liabilities to eRO of firms' current profit to total assets, F_CASH is the ratio of firms' liquid assets to total assets, F_DAMAGED is a dummy variable that takes a value of one if the firm is located in one of the cities or towns identified as affected by earthquake in the Act on Special Financial Support to meet a given disaster of extreme severity, B_LNASSETS is the natural logarithm of total assets owned by a firm's principal bank, B_CAP is the ratio of capital to assets of a firm's principal bank, B_ROA is the ratio of operating profit to total assets of a firm's main bank, B_HQDAMAGE is a dummy variable that takes a value if the headquarters of a firm's main bank is located in the earthquake-affected area, and B_BRDAMAGE is the ratio of the number of bank branches of a firm located in the area affected by the earthquake in the total number of branches of that bank. Note: B_BRDAMAGED is the ratio of the number of branches of a bank that were located in the area affected by the earthquake to the total number of branches of that bank.
B_LNASSETS is the natural logarithm of the total assets owned by the bank, B_CAP is the equity to assets ratio of the bank, and B_ROA is the bank's ratio of operating profit to total assets. The significance level of the sum of the coefficients onB_DAMAGEDenF_DAMAGED×B_DAMAGEDis based on the F-values under the null hypotheses that the sum is zero.
