Abstract

http://ssrn.com/abstract=192388
 
 

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The Value of Prominent Directors: Lessons in Corporate Governance from Transitional Japan


Yoshiro Miwa


Osaka Gakuin University

J. Mark Ramseyer


Harvard Law School

November 1999

Harvard Law and Economics Discussion Paper No. 267; and Harvard Law School Public Law Working Paper No. 9

Abstract:     
Observers of modern transitional economies urge firms there to ignore stock markets. Stock markets simply will not work in such environments, they explain. Firms should instead rely on debt finance, particularly bank debt. Only then will they be able to keep principal-agent (i.e., investor-manager) slack to manageable levels.

Turn-of-the-century Japanese firms faced problems that closely mirrored those in modern eastern Europe. Yet in Japan, the successful large firms did not rely on debt. Instead, they raised their funds through the stock market, and took a variety of steps to mitigate the principal-agent slack involved. As one of those steps, they recruited prominent investors to their boards.

Using data on firms in the cotton-spinning industry (arguably the most important industrial sector in turn-of-the-century Japan), we explore why the firms recruited prominent directors. First, we note that firms with such directors had higher profits than others. In part, they probably had higher profits because such investors had an eye for firms that would likely succeed. In part too, however, they seem to have had higher profits because those investors brought basic management skills -- they knew how to monitor and when to intervene.

Second, prominence held constant, we find that firms did not have higher profits by having directors affiliated with a bank or with other spinning firms. One might have thought directors with access to a bank or spinning technology would raise profits at a firm. In fact, they did not, for banks did not have the funds to lend, and the technolgy was freely available. Last, we explore whether the directors certified firm quality on behalf of other investors. Although firms with prominent directors apparently did have an advantage in the capital market, we conclude that quality certification was at most a by-product (if even that) of the monitoring and intervention these directors performed.

Number of Pages in PDF File: 47

JEL Classification: N25

working papers series





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Date posted: November 12, 1999  

Suggested Citation

Miwa, Yoshiro and Ramseyer, J. Mark, The Value of Prominent Directors: Lessons in Corporate Governance from Transitional Japan (November 1999). Harvard Law and Economics Discussion Paper No. 267; and Harvard Law School Public Law Working Paper No. 9. Available at SSRN: http://ssrn.com/abstract=192388 or http://dx.doi.org/10.2139/ssrn.192388

Contact Information

Yoshiro Miwa
Osaka Gakuin University ( email )
2-36-1 Kishibe-Minami
Suita, Osaka 5645811
Japan
J. Mark Ramseyer (Contact Author)
Harvard Law School ( email )
1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-496-4878 (Phone)
617-496-6118 (Fax)
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