Recherche Carnets de chercheur Victoria Mak

Victoria Mak


The influence of the Rise of Foreign Shareholders on Inter-Firm Alliances in Japan

31/08/2018

Abstract

This project argues that inter-firm alliances weaken as a result of the increased influences of domestic institutional shareholders and foreign shareholders. The purpose of this project is to provide empirical analyses on (i) the effects of foreign share ownerships of Japan-listed keiretsu firms on the levels of main bank borrowing, other bank borrowings, and main bank shareholdings,(ii) the effects of domestic institutional share ownerships of Japan-listed keiretsu firms on the levels of main bank borrowing, other bank borrowings, and main bank shareholdings, (iii) the effects of foreign share ownerships of Japan-listed keiretsu firms on the interlocking directorates of Japan-listed keiretsu firms, between 2009 and 2016. It hypothesises that the increased influences of domestic institutional shareholders and foreign shareholders may weaken relationships (i) between the main banks and their Japan-listed keiretsu clients, and (ii) among firms within their Japan-listed keiretsu groups.

The results of this paper are expected to demonstrate that (i) foreign share shareholdings have negative effects on levels of main bank borrowings and main bank shareholdings; (ii) the levels of foreign share shareholdings have positive effects on levels of the other bank borrowings of Japan-listed keiretsu firms; (iii) levels of foreign share shareholdings have negative impacts on interlocking directorates among Japan-listed keiretsu firms, (iv) domestic institutional share ownerships have negative effects on main bank borrowings and main bank shareholdings; and (v) domestic institutional share ownerships have positive effects on levels of the other bank borrowings of Japan-listed keiretsu firms.

To investigate these issues, this project uses three regression models: fixed-effects, random-effects and generalised method of moments Arellano Bond estimations.

Background

Japan’s Institutional Domains

Takahashi (2012) argues that Japan's bank-based financial system allows banks to allocate financial resources and to assist the government to manage its development policies. Therefore, strong ties are developed from mutual dependence between firms and their main banks. However, these ties are likely to have weakened due to the development of the capital markets/ the 1970s financial liberalisation (Takahashi, 2012). Since the financial liberalisation, Japanese firms have been able to raise funds from the capital markets, and foreign institutional shareholders have also been able to invest in Japanese firms (Arikawa and Miyajima, 2005; Jacoby, 2009).

In Japan, keiretsu firms are formed from the six largest financial groupings: Mitsui, Mitsubishi, Sumitomo, Fuyo, Dai-Ichi Kangyo, and Sanwa. Firms cross-hold each other’s equities within their own groups; directors serve on multiple boards of firms within their groups; and they only borrow from the main bank that is within their own group (Berglöf and Perotti, 1994; Gerlach, 1992). Firms are likely to benefit from preferential trading relationships and be equity holders of the firms within their keiretsu groups. The main banks are usually the credit and equity holders of the firms within their keiretsu groups.

Therefore, interlocking directorates strengthen relationships among keiretsu firms (Gerlach, 1992), and the cross-holding mechanisms among firms and their banks (i) strengthen their long-term relationships (Berglöf and Perotti, 1994), (ii) enable the main banks to monitor their borrowers closely which belong to the same keiretsu group (Aoki and Patrick, 1994), and (iii) protect their firms from hostile takeovers (Hayakawa and Whittaker, 2009; Milhaupt and West, 2003; Whittaker and Hayakawa, 2007).

However, the cross-holding mechanisms are arguably being weakened due to (i) increased levels of foreign shareholders (Ahmadjian and Robbins, 2005), (ii) successful keiretsu firms rising funds directly from the capital markets, instead of borrowing from their main banks (Arikawa and Miyajima, 2005), and (iii) cross-shareholding decreasing as a result of Japanese banks and insurance firms selling their shares during the 1990s Japanese financial crisis (Ahmadjian, 2008).

Scholars also attempt to investigate the effects on intra-firm relations and inter-firm alliances by employing institutional theory and varieties of capitalism (Hall and Soskice, 2001a; Walter and Zhang, 2012a). The intra-firm relations outline the dynamics of the relationships between company managements and their shareholders, as well as the interactions between company managements and their employees, and inter-firm alliances focus on the networks of keiretsu firms and their main banks (Walter and Zhang, 2012a, p. 10).

 

Japan’s Coordinated Market Model

Scholars have traditionally described Japan’s coordinated market model as a group-based coordination, in which keiretsu firms were (and still are) interconnected with each other across sectors, and keiretsu firms of each group are centered around a big company and a core bank (i.e. the main bank). Keiretsu encourage firms to develop distinctive corporate strategies, and to optimise their cross-sector technological transfer capabilities (Hall and Soskice, 2001b). Keiretsu firms support each other, and risks are shared (Takahashi, 2012).

Scholars have recently argued that a new type of capitalism is emerging in Japan, that is composed of both coordinated market model and the liberal market model (Carney et al., 2009; Hall and Soskice, 2001b; Sako and Kotosaka, 2012). This a result of the late 1970s financial liberalisation in Japan. While inter-firm cooperation and coordination still occurs within the keiretsu firms vertically and horizontally (Terjesen and Hessels, 2009), Takahashi (2012) argues that Japan’s economic model is gradually moving away from the “networked agent” system to the “atomised” system, under which individual (“atomised”) firms are able obtain funds individually from the capital markets.

Possible Key Contributions

Existing literature rarely empirically assesses the effects on intra-firm relations and inter-firm alliances resulting from the change of interlocking directorates and cross-holding mechanisms, although some scholars have produced empirical evidence on the effects on intra-firm relations and inter-firm alliances by examining the relationships between shareholding and interlocking directorates (Lincoln et al., 1992), the relationships between ownership structures and the downsizing of keiretsu firms (Ahmadjian and Robbins, 2005), and between the main banks and the capital structures of keiretsu firms (Arikawa and Miyajima, 2005).

Lincoln et al. (1992) find that levels of shareholdings are positively and statistically significantly related with interlocking directorates among Japanese firms in 1980, despite the decreased levels of cross-share ownerships among firms. This suggests that directors are dispatched to safeguard their investments and to enforce their ownership controls. This shows that inter-firm alliances are likely to evolve into multiple dimensions. Ahmadjian and Robbins (2005) find that foreign and domestic financial institutional shareholders have a positive impact on the downsizing of keiretsu firms, but had no effects on non-keiretsu firms between 1991 and 2000, indicating that foreign and domestic financial institutional shareholders weaken intra-firm relations between managements and their employees. Arikawa and Miyajima (2005) find that successful keiretsu firms were less dependent on their main banks between 1984 and 1990, and between 1996 and 2000, suggesting that the late 1970s financial liberalisation weakened the inter-firm alliances between successful keiretsu firms and their main banks.

Moreover, scholars have not investigated the implications of the rise of foreign ownerships on the relationships between firms and their main banks and the relationships among firms within their keiretsu group, and have not assessed the changes in intra-firm alliances and inter-firm relations as a result of increased shareholder pressures domestically and abroad. This research note argues that intra-firm alliances among keiretsu firms weaken as a result of (i) the rise of foreign shareholders, (ii) the increased demands for shareholder returns by domestic institutional shareholders, and (iii) reduced levels of cross-shareholdings between firms and their main banks.

This research note proposes to investigate the interactions between (i) publicly-listed keiretsu firms and their main banks (ii) listed keiretsu firms and domestic institutional shareholders, reflecting the distributed powers between managers and shareholders, (iii) listed keiretsu firms and foreign investors, and (iv) among listed keiretsu firms.

Point (i) assesses the inter-firm alliances between keiretsu firms and their main banks using cross-ownership data and the proxies of the strength of bank-firm relationship. Points (ii) and (iii) examine the intra-firm relations reflecting the distributed powers between managers and their shareholders (Walter and Zhang, 2012b) by assessing the ownership structures of keiretsu firms. Point (iv) examines inter-firm alliances among keiretsu firms using data on interlocking directorates.

Proposed Research Methodology

The main banks and their associated trading keiretsu firms can be identified using the Japan Company Handbook. The ownership data can be extracted from the Oriana database (for the share ownership information of non-financial firms) and the Orbis Bank Focus database (for the share ownership information of banks). The directorship data can be extracted from the Nikkei Needs database.

In terms of bank-firm relationships, scholars measure the strength of bank-firm relationships using (a) the duration of financial relationships or bank–borrower interactions through multiple financial services (Degryse and Van Cayseele, 2000), (b) the presence or absence of long-term credit ratings (Chava and Purnanandam, 2011), and (c) levels of interest expenses (Petersen, 1999).

However, due to the lack of data availability, method (a) is not applicable. Method (b) is also likely to be unsuitable, because successful keiretsu firms are likely to already borrow funds from the international capital markets, and they may also borrow funds from their main banks, regardless of the presence or absence of long-term credit ratings. Therefore, this research note proposes to proxy the strength of bank-firm relationships using two measurements: (i) the level of interest expense, and (ii) the levels and the concentrations of cross-share ownerships.

Reference

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Ahmadjian, C.L., Robbins, G.E., 2005. A Clash of Capitalisms: Foreign Shareholders and Corporate Restructuring in 1990s Japan. Am. Sociol. Rev. 70, 451–471. https://doi.org/10.1177/000312240507000305

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