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Internal Promotion and the Effect of Board Monitoring: A Comparison of Japan and the United States

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  • Meg Sato

Abstract

This paper analyses two pronounced features of Japanese corporate governance--large corporate boards almost entirely composed of insiders and the tendency to appoint CEOs through internal promotions. It is often argued that Japanese boards are less effective in monitoring CEOs than U.S. boards which tends to be composed of a small number of directors, majority of which are outsiders. I show that Japanese corporate governance exhibits less inefficiencies than U.S. corporate governance. I further discuss the recent changes in Japanese corporate governance and provide theoretical explanation that they do not necessarily enhance board monitoring.

Suggested Citation

  • Meg Sato, 2010. "Internal Promotion and the Effect of Board Monitoring: A Comparison of Japan and the United States," Asia Pacific Economic Papers 387, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:csg:ajrcau:387
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    File URL: https://crawford.anu.edu.au/pdf/pep/apep-387.pdf
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    References listed on IDEAS

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    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Hermalin, Benjamin E & Weisbach, Michael S, 1998. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," American Economic Review, American Economic Association, vol. 88(1), pages 96-118, March.
    3. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
    4. Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
    5. Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-570, October.
    6. Warther, Vincent A., 1998. "Board effectiveness and board dissent: A model of the board's relationship to management and shareholders," Journal of Corporate Finance, Elsevier, vol. 4(1), pages 53-70, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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