Credit Allocation for SMEs in an Aging Economy: Evidence from the COVID-19 and Global Financial Crises in Japan

This paper examines the relationship between managerial aging, succession prospects, and credit allocation to small and medium-sized enterprises (SMEs) in Japan. We focus on firms managed by elderly owners without designated successors, which we interpret as exhibiting weakened going-concern prospects. Using comprehensive firm-level data, we investigate firm performance, default risk, and bank lending behavior during normal periods and economic crises, particularly the Global Financial Crisis and the COVID-19 pandemic. We find that firms with elderly managers and those lacking successors exhibit lower profitability, slower growth, and higher probabilities of default and exit, with these adverse effects becoming more pronounced during crises. Despite their weak fundamentals, such firms experience increased reliance on bank borrowing during crisis periods, suggesting potential credit misallocation. This pattern was particularly strong during the COVID-19 crisis, likely reflecting extensive public financial support. Our findings highlight how population aging can distort credit allocation in SMEs and provide new evidence on crisis-driven misallocation in an aging economy.