The Rising Son Under the Shadow of Company Communities: Do Japanese Family Firms Really Excel?

Abstract

Japanese corporate governance has long attracted attention from scholars due to its stark differences from the Anglo-Saxon model. Indeed, scholars have pointed to the unique aspects of Japanese governance to explain Japan’s economic miracle, only to reverse their view, citing it as a major factor behind the lost decades of the ‘90s and ‘00s. A recent study by Mehrotra, Morck, Shim, and Wiwattanakantang (2013) brings Japanese economic governance back into the spotlight. In their analysis of family-run firms, the authors find that although inherited control is linked to poor firm performance in other developed economies, heir-run firms actually perform well in Japan. In search of a convincing explanation for this finding, we studied the same sample of firms over the same period and reached varying results. Our paper relies on the concept of a “company community” to explain why Japanese family firms appear to outperform non-family firms. The company community, consisting of management and shareholders, is the core of the Japanese non-family listed firm. Japanese family firms, on the other hand, modify the characteristics of the company community to avoid critical defects in monitoring, incentives, and external labor markets. Rather than concluding that Japanese family firms performed well, the more plausible explanation may be that Japanese listed firms on the whole performed badly.

Keywords: family firm, corporate governance, company community

JEL Classification: C32, C34