A Financing Model for a Japanese-Style Firm

In this paper, in order to explain theoretically the structure of corporate financing in Japan—in particular, changes in fund raising during the 1980s—we present the "internal common assets" hypothesis and the "relative cost" hypothesis, in addition to the agency cost hypothesis explained elsewhere (Sudo et al. 1996). "Internal common assets" means assets that are accumulated within a firm based on its retained earnings, and are not necessarily defined exactly as to their ownership. Japanese firms are viewed as attempting to maximize the total sum of internal common assets and aggregate market value of stocks, less any debt. We call this sort of business financing behavior Japanese-style corporate finance. The principle objective of this finance is to take into consideration, not only the welfare of stockholders, but also the welfare of employees. Thus, in this respect, it is largely different from the standard type business financing that pursues the welfare of stockholders alone. Although this Japanese style of business financing is efficient, in order to maintain it, it is necessary to protect the firm from the danger of takeover. From this view-point, it is thought that Japanese-style business financing and the main bank system or the reciprocal stock holding system, which are used as a means to protect against takeover, have a complementary institutional relationship to each other.