Purifying Japan's Banks: Issues and Implications
49 Pages Posted: 25 Jan 2006
Date Written: January 2006
Abstract
We use a simple real options framework and empirical data to establish that although Japanese banks hold borrowers' shares, their interest is more aligned as a contractual claimant than a residual claimant of corporations. We then explain why the Japanese model of corporate governance was useful during the 'catching up' growth of that country's postwar reconstruction decades, but became problematic subsequently. The interests of shareholders, creditors, workers, and managers are more readily aligned because such growth projects with highly predictable cash flows. Once on the technological frontier, 'keeping up' growth requires risk taking and a tolerance for 'creative destruction'. This is better accommodated by entrusting corporate governance to firms' true residual claimants, their shareholders.
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