For most of the postwar period, the U.S. and Japan have had polar opposite corporate financial structures. The U.S. system has featured low leverage and low monitoring of corporate management by investors, while the Japanese system has featured high leverage and high monitoring. During the last 15 years, however, the two systems have begun to converge. Leverage has increased in the U.S., particularly when measured by interest expense ratios, and the increase has been concentrated in certain firms. In Japan, leverage has decreased across the board. In the U.S., debt-holders' interests may now be represented more effectively; Jensen (1989) argues that LBO partners are a new organizational form which can monitor corporations more effectively. In Japan, while the role of a main bank as a delegated monitor is similar to the LBO partners in the U.S., the growing use of public debt held by outsiders rather than main banks suggests the opposite trend. This paper uses cross-sectional data to reveal more clearly the changing capital structure of Japanese corporations
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