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Purifying Japan's Banks: Issues and Implications

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  • Randall Morck
  • Bernard Yeung

Abstract

We use a simple real options framework and empirical data to establish that although Japanese banks hold borrowers’ shares, their interest is more aligned as 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 known-technology physical capital- intensive projects with highly predictable cash flows. Once 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.

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  • Randall Morck & Bernard Yeung, 2006. "Purifying Japan's Banks: Issues and Implications," Harvard Institute of Economic Research Working Papers 2103, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:2103
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    Cited by:

    1. Toru Yoshikawa & Abdul A. Rasheed, 2010. "Family Control and Ownership Monitoring in Family-Controlled Firms in Japan," Journal of Management Studies, Wiley Blackwell, vol. 47(2), pages 274-295, March.
    2. Yener Altunbaş & Alper Kara & Adrian van Rixtel, 2007. "Corporate governance and corporate ownership: The investment behaviour of Japanese institutional investors," Occasional Papers 0703, Banco de España;Occasional Papers Homepage.
    3. Jean McGuire & Sandra Dow, 2009. "Japanese keiretsu: Past, present, future," Asia Pacific Journal of Management, Springer, vol. 26(2), pages 333-351, June.
    4. 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.

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