There are still controversial arguments between the credit crunch (underinvestment) and evergreening investment (overinvestment) in Japan. Seshimo and Yamazaki (2004) shows that these hypotheses are not contradictory one another, taking into account the violations of the absolute priority rule (APR) in Japan. In this paper, we estimate loan supply functions of Japanese banks and statistically test the APR violation hypothesis and alternative debt over-hang hypothesis. Focusing on the signs of coefficients about the cash flow in loan supply functions, we obtain the consistent results with the APR-violation hypothesis, but not with the debt over-hang hypothesis.
