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Conflicts of Interest in Japanese Insolvencies: The Problem of Bank Rescues

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  • Yoshiro Miwa

    (Faculty of Economics, University of Tokyo)

  • J. Mark Ramseyer

    (Harvard Law School)

Abstract

Economists and legal scholars routinely posit an implicit contract between Japanese firms and their principal lender (called their "main bank"). Under this arrangement, the bank implicitly agrees to rescue the firm (through financial and managerial help) when times turn bad. Out of court, it rescues the firm from insolvency. Not only does it save the investments specific to the troubled firm, it lowers the use of costly bankruptcy proceedings and cuts the costs of those bankruptcy procedures it does occasionally invoke. Given the creditor-shareholder conflicts of interest that arise as firms approach insolvency, such arrangements would seem unstable. Yet according to a long sociological tradition, conflicts of interest are inherently less problematic in Japan than in the West. According to the emerging economic and legal tradition, Japanese economic actors do face those conflicts, but keep them in check through reputational concerns, close-knit ties, and government supervision. Using two datasets of troubled firms from the 1970s and 1980s, we ask whether Japanese main banks in fact rescue distressed borrowers. We find no evidence that they do: large Japanese firms fail; when large firms approach insolvency main banks do not increase the share of the firm's debt they bear; stronger ties between distressed firms and their main bank do not facilitate loans; and troubled firms do not try to preserve their main bank relationship. Instead, the claim that Japanese banks implicitly agree to rescue firms is sheer myth. Conflicts of interest do indeed matter in Japan -- and they matter enough to prevent precisely the incentive-incompatible rescue deals that scholars in the field so routinely posit.

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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-240.

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Length: 33 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:tky:fseres:2003cf240

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  1. Dore, Ronald, 2000. "Stock Market Capitalism: Welfare Capitalism: Japan and Germany versus the Anglo-Saxons," OUP Catalogue, Oxford University Press, number 9780199240616, September.
  2. Sheard Paul, 1994. "Reciprocal Delegated Monitoring in the Japanese Main Bank System," Journal of the Japanese and International Economies, Elsevier, vol. 8(1), pages 1-21, March.
  3. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  4. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September.
  5. Morck, Randall & Nakamura, Masao & Shivdasani, Anil, 2000. "Banks, Ownership Structure, and Firm Value in Japan," The Journal of Business, University of Chicago Press, vol. 73(4), pages 539-67, October.
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Cited by:
  1. Yoshiro Miwa & J. Mark Ramseyer, 2004. "Deregulation and Market Response in Contemporary Japan: Administrative Guidance, Keiretsu, and Main Banks," CIRJE F-Series CIRJE-F-267, CIRJE, Faculty of Economics, University of Tokyo.

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