Japan's Banking Crisis: Who has the Most to Lose?

Japan has experienced a deep and prolonged banking crisis in the 1990s. In this paper we attempt to identify the characteristics of companies which have the most to lose from the banks' malaise. Using stock price data, we calculate abnormal returns of non-financial companies around significant dates in the history of the banking crisis, starting in 1995. The events we study include various government actions to address the crisis, downgrading of banks by international rating agencies, and bank mergers. We find that not all companies are equally sensitive to events in the banking sector. The most affected are small companies, with low profits, in low-tech sectors, with high leverage and limited access to bond markets. These findings are consistent with macroeconomic "credit crunch" theories according to which small companies with limited reputation are the most affected when banks reduce lending. Our results are also in line with theories suggesting that bank debt is not very important for financing innovation.

Long Term Changes in Voting Power and Control Structure following the Unification of Dual Class Shares

We follow the evolution of ownership structure in a sample of 80 Israeli companies that unified their dual-class shares in the 1990s, and compare it with a control sample of firms that maintained their dual share structure at least until 2000. Our main findings are as follows. First, controlling shareholders offset the dilution of voting rights they incurred upon unification by: 1) increasing their holdings prior to the unification (ex-ante preparation), and 2) by buying shares afterwards; by the end of the sample period their voting power was only marginally lower than in the control sample. This suggests that marginal voting rights are important to controlling shareholders even beyond the 50% threshold. Second, share unifications were not associated with much change in the identity of controlling shareholders. Third, the proportion of firms affiliated with pyramidal business groups in the sample of unifying firms was lower than in the population of listed firms as a whole and not different from that in the control sample, suggesting that pyramidal ownership structures did not replace dual class shares. Finally, unifying firms did not exhibit a substantial improvement in their performance and valuation in comparison with the control sample. We conclude that the regulatory attempt to enforce one share-one vote yielded, at best, a minor improvement in corporate governance.Dual class shares, corporate governance

Business Groups in Emerging Markets: Paragons or Parasites?

Diversified business (or corporate) groups, consisting of legally independent firms operating in multiple markets, are ubiquitous in emerging markets and even in some developed economies. The study of groups, a hybrid organizational form between firm and market, is of relevance to industrial organization, corporate finance, development, economic growth and other domains of economic inquiry. This survey begins with stylized facts on groups around the world, and proceeds to a critical review the existing literature, which has focused almost entirely on groups as diversified entities and on conflicts between controlling and minority shareholders. Other schools of thought on the political economy of corporate groups, on groups and monopoly power, and on groups as networks are discussed next. We then proceed to promising, yet virtually unexplored, alternative lenses for viewing groups, for example, as quasi venture-capitalists or as family-based structures. The analysis points out important biases in the literature including the avoidance of a serious discussion of the origins of business groups, and the unfounded assumption that rent-seeking is the only feasible political economy equilibrium in an interaction between groups and the government. We note that the empirical tendency to use recent data implies that the vast majority of studies exploit cross-sectional variation; the absence of (long) time-series data ensures that some conceptually important issues, such as how groups shape the environment in which they operate, receive relatively little attention. Lastly, we outline an agenda for future research.

Business Groups in Emerging Markets: Paragons or Parasites?

Diversified �business �groups, �consisting �of �legally �independent �firms �operating � across �diverse �industries, �are �ubiquitous �in �emerging �markets. �Groups �around �the �world � share �certain �attributes �but �also �vary �substantially �in �structure, �ownership, �and �other � dimensions. �This �paper �proposes �a �business �group �taxonomy, �which �is �used �to �formu-�? � late �hypotheses �and �present �evidence �about �the �reasons �for �the �formation, �prevalence, � and �evolution �of �groups �in �different �environments. �In �interpreting �the �evidence, �the � authors �pay �particular �attention �to �two �aspects �neglected �in �much �of �the �literature: �the � circumstances �under �which �groups �emerge �and �the �historical �evidence �on �some �of �the � questions �addressed �by �recent �studies. �They �argue �that �business �groups �are �responses � to �different �economic �conditions �and �that, �from �a �welfare �standpoint, �they �can �some-�? � times �be ��paragons� �and, �at �other �times, ��parasites.� �The �authors �conclude �with �an � agenda �for �future �research.

Sources of Funds and Investment Activities of Venture Capital Funds: Evidence from Germany, Israel, Japan and the UK

We compare sources of funds and investment activities of venture capital (VC) funds in Germany, Israel, Japan and the UK using a newly constructed data set. The data provide a rare opportunity to evaluate relations between funds' sources of finance and activities. We find that sources of VC funds differ significantly across countries, e.g. banks are particularly important in Germany, corporations in Israel, insurance companies in Japan, and pension funds in the UK. VC investment patterns also differ across countries in terms of the stage, sector of financed companies and geographical focus of investments. These differences in investment patterns are related to the variations in funding sources - for example, bank and pension fund backed VC's invest in later stage activities than individual and corporate backed funds. The relations differ across countries; for example, bank backed VC funds in Germany and Japan are as involved in early stage finance as other funds in these countries, whereas they tend to invest in relatively late stage finance in Israel and the UK. We consider the implication of this for the influence of financial systems on relations between finance and activities.

Japan's Banking Crisis: Who has the Most to Lose?

Japan has experienced a deep and prolonged banking crisis in the 1990s. In this paper we attempt to identify the characteristics of companies which have the most to lose from the banks' malaise. Using stock price data, we calculate abnormal returns of non-financial companies around significant dates in the history of the banking crisis, starting in 1995. The events we study include various government actions to address the crisis, downgrading of banks by international rating agencies, and bank mergers. We find that not all companies are equally sensitive to events in the banking sector. The most affected are small companies, with low profits, in low-tech sectors, with high leverage and limited access to bond markets. These findings are consistent with macroeconomic "credit crunch" theories according to which small companies with limited reputation are the most affected when banks reduce lending. Our results are also in line with theories suggesting that bank debt is not very important for financing innovation.