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Purifying Japan's Banks: Issues and Implications

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  • Randall Morck

    (School of Business, University of Alberta, 3-23 Business Building, Edmonton, Alberta, Canada T6G 2R6)

  • Bernard Yeung

    (Stern School of Business New York University 44 West 4th Street, Suite 7-190, New York, NY 10012-1126, USA.)

Abstract

We use a simple real options framework and empirical data to establish that although Japanese banks hold borrowers' shares, their interest is more along the lines of a contractual claimant than a residual claimant of corporations. We then explain why the Japanese model of corporate governance was useful during the "catching-up" growth of that country's postwar reconstruction decades but became problematic subsequently. The interests of shareholders, creditors, workers, and managers are more readily aligned because such growth entails investment in knowntechnology physical-capital-intensive projects with highly predictable cash flows. Once firms are on the technological frontier, "keeping-up" growth requires risk taking and a tolerance for "creative destruction." This is better accommodated by entrusting corporate governance to firms' true residual claimants, their shareholders. (c) 2006 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Asian Economic Papers.

Volume (Year): 5 (2006)
Issue (Month): 1 (January)
Pages: 1-32

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Handle: RePEc:tpr:asiaec:v:5:y:2006:i:1:p:1-32

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Cited by:
  1. Toru Yoshikawa & Jean McGuire, 2008. "Change and continuity in Japanese corporate governance," Asia Pacific Journal of Management, Springer, vol. 25(1), pages 5-24, January.
  2. Jean McGuire & Sandra Dow, 2009. "Japanese keiretsu: Past, present, future," Asia Pacific Journal of Management, Springer, vol. 26(2), pages 333-351, June.
  3. Aggarwal, Raj & Dow, Sandra M., 2012. "Dividends and strength of Japanese business group affiliation," Journal of Economics and Business, Elsevier, vol. 64(3), pages 214-230.
  4. Yener Altunbaş & Alper Kara & Adrian van Rixtel, 2007. "Corporate governance and corporate ownership: The investment behaviour of Japanese institutional investors," Banco de Espa�a Occasional Papers 0703, Banco de Espa�a.

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