Corporate Governance, Business Cycles & Networks

Abstract

Japan is characterized by three distinct kinds of economic organization: the horizontal keiretsu, the vertical keiretsu, and firms unaffiliated with either type of keiretsu. We find that the relationship between ownership concentration and firm performance varies depending upon the nature of the network ties and the stage of the business cycle. While we find strengthening evidence of positive ownership effects in vertical keiretsu and unaffiliated firms; among horizontal keiretsu we provide evidence that powerful owners exhibit entrenchment propensities. Moreover, entrenchment by powerful keiretsu owners occurs during recessionary times. Thus are study supports other work which hypothesizes that relationship-based economies are most vulnerable during periods of economic downturn. Our results demonstrate that regardless of the institutional context (sophisticated or developing), or ownership identity (family versus non-family), diversified business groups seem to act in a predictable way during periods of economic downturn - whatever benefits that may be associated with group affiliation seem to dissipate when they are most needed by member firms (as well as the economy in general). These results lead us to concur with Almeida and Wolfenzon (2006) - business groups should be dismantled. The tendency for powerful owners to engage in tunnelling during economic downturn is not restricted to emerging market contexts.

Keywords: governance, business groups, Japan

JEL Classification: G30