Corporate Governance and Investment in East Asian Firms: Empirical Analysis of Family-Controlled Firms

In this paper, we analyze in quantitative terms the influence of family control on the pattern of corporate investment, using firm-level data from Indonesia, Korea, Malaysia, the Philippines, and Thailand to regress the investment function and focusing on the family ownership structure that characterizes East Asian corporate governance. Our results present evidence that family-controlled firms, the majority of the firms in our data set, face more severe internal financing constraints than non-family-controlled firms. Our findings suggest that the mechanism in East Asian countries, which is commonly assumed to permit smooth reallocation of money among investment projects through the internal capital markets of family-controlled group firms, does not work well, and that, coupled with the difficulty of obtaining financing from external capital markets, it my lead to strict internal financing constraints on investment.Family-controlled firm, Corporate Investment, Asian crisis

Can the Financial Restraint Hypothesis Explain Japan's Postwar Experience?

While the Japanese banking sector seems to have disciplined borrower firms for inefficient management in the high growth era, its fragility was revealed by the serious non-performing loans since the early 1990s. According to 'the financial restraint hypothesis' advocated by Hellmann, Murdock and Stiglitz (1996), the comprehensive competition-restricting regulation was effective in motivating banks to prudently monitor their client firms by giving the banks excess profit opportunities. The financial deregulation started at the beginning of the 1980s undermined banks' profitability and induced the banks to shirk monitoring. Thus, according to the financial restraint hypothesis, the Japan's bank crisis in the 1990s was a consequence of the financial deregulation in the 1980s. This paper criticizes the financial restraint hypothesis, and proposes the alternative hypothesis that the banking sector was potentially fragile even before the 1980s because the government was unable to penalize inefficiently managed banks in credible ways. The manufacturing firms, which were disciplined by competitive pressures from abroad, reduced their reliance on bank credit in the late 1970s, and non-traded good industries such as real estate became major borrowers of bank credit in the 1980s. This structural change in the bank credit market revealed the potential fragility of the Japanese banking sector. The empirical analyses based on more than 1,600 manufacturing firms supports the alternative hypothesis this paper proposes.

"Have Banks Contributed to Efficient Management in Japan's Manufacturing?"

This paper statistically reexamines the conventional view that the main bank relationship has been an important element of corporate governance in Japan. According to the view, in postwar Japan, the main bank relationship has contributed to efficient management of borrower firms in place of the capital market that disciplines corporate management in the Anglo-American economy. Our analysis finds that neither the main bank relationship nor other capital market factors, which the standard governance theory regards as important determinants of managerial efficiency, consistently influenced efficiency of manufacturing firms' management defined by the total factor productivity (TFP). Instead, market competition, particularly competitive pressures from abroad, is found to have consistently enhanced management efficiency. Thus, the conventional view exaggerates importance of the main bank relationship in the Japanese corporate governance framework.

A Review of Japan's Bank Crisis from the Governance Perspective

Why has Japan suffered from the NPL problem for such a long time? We will answer to this question from a governance perspective that emphasizes important influence of the governance structure on bank management. In our opinion, Japan failed to motivate banks to play the role of monitoring essential to the bank-centered financial system. We will stress that there existed a vacuum of governance in the bank management in the sense that bank managers were not effectively disciplined as to attain sufficient prudence in there management. The vacuum of governance accounts for the fragility of the banking sector and, more importantly, the prolongation of the NPL problem in Japan.

Have Banks Contributed to Efficient Management in Japan's Manufacturing?

This paper statistically reexamines the conventional view that the main bank relationship has been an important element of corporate governance in Japan. According to the view, in postwar Japan, the main bank relationship has contributed to efficient management of borrower firms in place of the capital market that disciplines corporate management in the Anglo-American economy. Our analysis finds that neither the main bank relationship nor other capital market factors, which the standard governance theory regards as important determinants of managerial efficiency, consistently influenced efficiency of manufacturing firms' management defined by the total factor productivity (TFP). Instead, market competition, particularly competitive pressures from abroad, is found to have consistently enhanced management efficiency. Thus, the conventional view exaggerates importance of the main bank relationship in the Japanese corporate governance framework.

Silent Large Shareholders and Entrenched Bank Management: Evidence from the Banking Crisis in Japan

We investigate the cause of this banking crisis that has jeopardized the stability of the financial and economic system since the 1990s. Following Hanazaki and Horiuchi (2001), we argue that the deficiency of effective corporate governance of banks in Japan has caused inefficient management. Our focus here is the role of largest shareholders who happen to be banks and insurers. We argue that these large shareholders appear to collude or conspire with management instead of being tough monitors. Consequently, the management became entrenched. Our empirical results show that during the 1980s these "entrenched banks" extended more lending. Even after the collapse of the bubble in the 1990s, they did not dramatically undertake restructuring to cope with the accumulated bad loans.Corporate Governance, Ownership Structure, Managerial Entrenchment, Shareholders Activism

F.A. Hayek: The Road to Serfdom

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