Corporate Restructuring in Japan: Who Monitors the Monitor?

NCU Economics Discussion Paper No. 430

37 Pages Posted: 27 Feb 2007

See all articles by Kotaro Inoue

Kotaro Inoue

Tokyo Institute of Technology

Hideaki Kiyoshi Kato

Nagoya University - Graduate School of Economics

Marc Bremer

Nanzan University

Date Written: February 26, 2007


This is the first comprehensive study to empirically analyze the economics of private (out-of-court) debt restructurings of financially distressed Japanese companies spanning the period from the burst of the bubble economy of Japan in 1990 to the time when the excessive bad debt problems of major firms were recognized as resolved in March 2005 on the basis of the stock prices of more than 200 restructurings. In Japan the mechanism of corporate monitoring is not market based (shareholder and public bondholder based) but large-investor based (large stakeholder based)typically, banks and affiliated companies. These stakeholders are expected to efficiently resolve potential bankruptcy or collapse with better information resulting from their long-term relationship with the distressed firms. In contrast, however, this study finds that out-of-court restructurings led by banks or affiliated companies failed to gain the trust of the market because of their procrastinations in implementing fundamental solutions; and therefore, there is a need for third-party monitoring. Compared to the analysis of out-of-court settlements in the United States by Gilson et al. (1990), this study finds that agreements on out-of-court restructuring in Japan are attained more easily than in the United States. However, without third-party mediation, no fundamental changes can be expected from the restructurings. This forbearance by banks and affiliated companies in addressing the needs of distressed firms indicates the weakness of banks and affiliated companies in instituting discipline among themselves, thereby showing the importance of instituting a system to "monitor the monitor".

Keywords: Financial Distress, Debt Restructuring, Corporate Governance, Stock Market, Japan

JEL Classification: G33, G34, G38

Suggested Citation

Inoue, Kotaro and Kato, Hideaki K. and Bremer, Marc, Corporate Restructuring in Japan: Who Monitors the Monitor? (February 26, 2007). NCU Economics Discussion Paper No. 430, Available at SSRN: or

Kotaro Inoue (Contact Author)

Tokyo Institute of Technology ( email )


Hideaki K. Kato

Nagoya University - Graduate School of Economics ( email )

1 Furo-cho
Nagoya 464-8601, 464-8601
+81-52-789-4928 (Phone)
+81-52-789-4928 (Fax)

Marc Bremer

Nanzan University ( email )

18 Yamazato-cho
Nagoya 466
81 052 832-3111 (Phone)
81 052 832-2104 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics