Corporate Governance and Firm Value in Japan: Evidence from 1985 to 1998

Abstract

In this paper, we examine how alternative corporate governance mechanisms work in Japan, using the panel data on the equity ownership and bank loans of manufacturing companies listed on the Tokyo Stock Exchange (TSE) first section over the 1985-1998 period. First, we find that the main bank borrowing is negatively related to firm value until the early 1990s, which is consistent with the view of the main bank extracting surplus from client firms. Second, we show that the cross shareholdings between the main bank and client firms are negatively related to firm value during the sample period. Third, our results on the inter-corporate shareholdings show that one-way shareholdings tend to be positively related to firm value, but cross shareholdings tend to be negatively related to firm value when their effects are statistically significant. Finally, we find that managerial ownership is monotonically and positively related to firm value. The result of a simple check suggests that the endogeneity of managerial ownership did not drive our finding at least for the second subperiod (1992-1998).

JEL Classification: G32, G34