Keiretsu Firms Research Articles

Japanese Corporate Groupings (Keiretsu) and the Informativeness of Earnings

This paper examines the effect of Japanese corporate groupings, keiretsu, on the informativeness of earnings. Keiretsu firms maintain close financial and personal ties through cross-shareholding, credit holding, interlocking corporate directorates, and various business transactions. We propose that the strong interrelations of the keiretsu ownership structure enhance the informativeness of earnings through efficient monitoring of managerial performance. Our empirical results show that keiretsu firms have higher earnings response coefficients than those of non-keiretsu firms, the earnings response coefficient increases as the strength of the keiretsu relationship increases, and discretionary accruals by keiretsu firms are smaller than discretionary accruals of non-keiretsu firms. All of these results suggest that the monitoring ability of the keiretsu improves the informativeness of earnings.

Does rollover risk matter to payout policies? Evidence from Japanese listed firms

This study examines the effects of rollover risk of a firm’s debt on its payout policies, considering differences in the structure of that debt. The results reveal that in the face of rollover risk, firms decrease dividends, in addition to the total payout to shareholders, including stock repurchases. However, these results are more pronounced for firms that depend on bank financing as compared to those firms that have access to the public debt markets. The study determines that the relationship between rollover risk and payout policy weakens for firms that do not have financing constraints, implying that firms’ payout policies can be adjusted when firms facing financial constraints need more financial flexibility. Additionally, by identifying Japan’s unique groups of firms (“keiretsu”), the study attempts to analyze how information asymmetry and agency conflicts affect firms’ payout policies. It finds that keiretsu firms are likely to reduce dividend payouts as their rollover needs increase; however, non-keiretsu firms are less inclined to do so.

The relevance of keiretsu affiliation on disclosure quality in contemporary Japanese economy

ABSTRACT Corporate governance reforms were introduced in Japan in the 2000s to improve investor protection and disclosure quality. Given the importance of keiretsu-affiliated firms in the Japanese economy, our study investigates the association between keiretsu affiliation and disclosure quality. We find no systematic difference in disclosure quality between listed Japanese keiretsu and non-keiretsu-affiliated firms. Instead, we find that disclosure quality is positively associated with firm size, profitability, directors’ share ownership, overseas sales, and access to international capital. Moreover, no gap in disclosure quality between old keiretsu firms with zaibatsu heritage and post-war emerging keiretsu firms is observed.

Investment and Deleveraging Financed by Dividends: Evidence from Japanese Business Groups

With a large sample from Japan during the period of 1990-2012, we find firms that belong to business groups (‘keiretsu’) pay more cash dividends than firms not affiliated with any group. The difference between the two groups of firms is greater when the dividend-receiving firms have better investment opportunities, are in financial distress, or when the linkage between them and the dividend-paying firms is stronger. Using exogenous changes to taxes on corporate dividends and difference-in-difference and falsification tests, we further establish that keiretsu firms’ dividend payouts have a causal impact on receiving firms’ investment and debt policies. Our results highlight the importance of inter-firm financing, especially during periods of high external financing costs, even for firms in a developed economy.

Investment and Deleveraging Financed by Dividends: Evidence from Japanese Business Groups

With a large sample from Japan during the period of 1990-2012, we find firms that belong to business groups (‘keiretsu’) pay more cash dividends than firms not affiliated with any group. The difference between the two groups of firms is greater when the dividend-receiving firms have better investment opportunities, are in financial distress, or when the linkage between them and the dividend-paying firms is stronger. Using exogenous changes to taxes on corporate dividends and difference-in-difference and falsification tests, we further establish that keiretsu firms’ dividend payouts have a causal impact on receiving firms’ investment and debt policies. Our results highlight the importance of inter-firm financing, especially during periods of high external financing costs, even for firms in a developed economy.

Unrealized Gains and Losses of Securities, Abnormal Returns, and Risk Sharing Among Keiretsu Firms

Unrealized Gains and Losses of Securities, Abnormal Returns, and Risk Sharing Among Keiretsu Firms

Keiretsu centrality — profits and profit stability: A power dependence perspective

Prior studies compare keiretsu member firm and independent firm performance. Here, we use historical and power dependence perspectives to theorize that the Japanese keiretsu system primarily benefits the most central firms. We test this by examining the performance of two types of keiretsu firms (central firms and other member firms) within two types of keiretsu (horizontal and vertical). We hypothesize and find that: (1) central vertical keiretsu firms are more profitable than central horizontal keiretsu firms; (2) central horizontal keiretsu firms have greater profit stability than central vertical keiretsu firms; (3) central vertical keiretsu firms are more profitable than non-central vertical keiretsu firms; and (4) central horizontal keiretsu firms have greater profit stability than non-central horizontal keiretsu firms. Implications for managers and future research directions are discussed.

Corporate restructuring, financial deregulation, and firm value: Evidence from Japanese “spin-ins”

This paper examines the impact on firm value from the restructuring process of the keiretsu system due to Japan's deregulation. We focus on unique internal restructuring transactions called “spin-ins” that are triggered by the Amendment of the Commercial Code in 2001. We show that significant positive abnormal returns exist around the announcement of the spin-ins. These announcement returns have a positive relation to keiretsu affiliation and bank financing. Also, we find that Japanese spin-ins result in a significant improvement in investment-Q sensitivity, especially for keiretsu firms. Our results support the argument that the keiretsu system has transformed itself into a more efficient organization through the recent deregulation in financial markets.

Has the Korean chaebol model succeeded?

PurposeThe purpose of this paper is to investigate how Korean conglomerates (chaebol) have rapidly ascended to international prominence. The success of Korean chaebol firms seems to be associated with internal market transactions. Just as Japanese keiretsu firms succeeded by utilizing a bank‐centred financing system, Korean chaebol firms devised an internal financing system such as payment guarantees and collateral provisions in a restrictive regulatory environment.Design/methodology/approachThis study examines the effects of such internal market transactions on the technical efficiency of chaebol firms using a stochastic frontier function for a panel data set of 1,675 firms from 1992 to 1998.FindingsThe study has found that chaebol firms have achieved a net gain in technical efficiency by utilizing internal market transactions as a way of mitigating liquidity constraints. Thus, the chaebol's role as an internal capital provider has given Korean conglomerates a competitive advantage in product pricing and capital financing, which is the main source of the success of Korean chaebol firms.Originality/valueWhat is new in the paper is that the positive effects of the Korean chaebol on the Korean economy have outweighed the negative effects of the chaebol. The paper has provided empirical evidence that the chaebol played a major role in transforming the Korean economy from an agricultural economy to an IT‐led economy. The main value of the paper may be found in its attempt to analyze the technical efficiency of Korean large business groups using a stochastic frontier production approach. The paper will appeal to readers who are interested in the driving forces of rapid economic growth in a developing economy.

Conglomerate Structure and Capital Market Timing

We examine the effects of keiretsu structure on capital market‐timing. Keiretsu groups offer a hybrid structure between fully integrated conglomerates and stand‐alone firms. We find that past market conditions affect the capital structure of keiretsu firms more than they affect the capital structure of unaffiliated firms. The decision to issue equity is more correlated with market conditions for keiretsu members than it is for unaffiliated firms. The stock returns of keiretsu firms following the issuance of equity decrease with the size of the issuance. These results suggest that keiretsu members time the issuance of equity more so than stand‐alone firms.

Are Member Firms of Corporate Groups Less Risky?

The evidence we uncover suggests that the practice of profit and risk sharing among keiretsu firms reduces the firm level idiosyncratic risk. However, rather than eliminating firm‐level risk, it is being transformed into market‐level risk. Since market‐level risk is priced, this actually destroys shareholders’ wealth. Additionally, the heightened correlation among keiretsu firms essentially diminishes the diversification efficacy of a portfolio of keiretsu firms. In summary, our results suggest that the practice of profit and risk sharing, which on the surface seems to be a blessing, may actually have a detrimental effect on the value of keiretsu firms.

Financial distress, information asymmetry, and syndicate structure: Evidence from Japanese borrowers

This paper examines how borrower firm characteristics affect syndicate size structure in the Japanese loan market for the 1999–2003 period when the banking system is undergoing a major consolidation. We find that syndicates are smaller when borrowers have higher credit risk and when borrowers present larger information asymmetries to the lending group. Interestingly, however, these results are primarily driven by keiretsu (business group) firms. This suggests that the benefits of enhanced monitoring and superior renegotiation prospects are especially useful for banks participating in syndicated loans to Keiretsu firms in Japan rather than informationally opaque, independent firms.

Conglomerate Structure and Capital Market Timing

We examine the effects of keiretsu structure on capital market timing. Keiretsu groups offer a hybrid structure between fully integrated conglomerates and stand alone firms. We find that past market conditions affect the capital structure of keiretsu firms more than they affect the capital structure of unaffiliated firms. The decision to issue equity is more correlated with market conditions for keiretsu members than it is for unaffiliated firms. The stock returns of keiretsu firms following the issuance of equity decrease with the size of the issuance. These results suggest that keiretsu members time the issuance of equity more so than stand alone firms.

Pre-clusterization in emerging markets: the Toyota group's entry process in China

Drawing on network analysis and informing the internationalization process of Japanese firms, this study introduces an ad hoc entry strategy, termed ‘pre-clusterization’. Unlike conventional keiretsu firms, competitive suppliers in a well-integrated network can enter a new market and begin clustering in a location that the core firm targets before the full entry of the core firm. The process of pre-clusterization is illustrated using a case study of the Toyota Group in China. A number of testable propositions are presented. Findings reveal the importance of strategic collective actions when coping with intensive competition and uncertainty in emerging market contexts.

Propping and tunneling: Empirical evidence from Japanese keiretsu

We examine the response of horizontal and vertical keiretsu to the changing economic and regulatory climate in Japan from 1987 to 2001. We find evidence of profit tunneling of more weakly affiliated keiretsu firms during strong economic times. We observe propping of weakly aligned firms during recession. Many horizontal keiretsu firms strengthened their degree of adhesion to the horizontal keiretsu in response to increasingly tightened credit conditions post-1991. The motivation behind strengthened affiliation appears primarily linked to the goal of overcoming financial constraints by accessing the internal capital market of the business group.

Capital Investments and Stock Returns in Japan*

ABSTRACTThe negative relation between capital investments and subsequent stock returns, found in the United States, is not observed in Japan, which is inconsistent with the risk‐based explanation. More specifically, we find no significant relation between capital expenditures (CE) and subsequent stock returns for either the entire sample or for keiretsu firms. However, in the pre‐1990 subperiod, there is a positive relation between increased CE and subsequent risk‐adjusted returns among independent firms, especially for those firms that have high cash flows and/or low leverage. These results are consistent with existing evidence that independent firms are financially constrained in the pre‐1990 period and that keiretsu main bank monitoring effectively controls the overinvestment problem.

Corporate Governance, Business Cycles & Networks

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.

An Application of Self-Organizing Maps to Financial Structure Analysis of Keiretsu versus Non-Keiretsu Firms in Japan

It has been argued that keiretsu in Japan allows its member firms to maintain a financial structure different from that of non-keiretsu member firms. In this paper, we use two different types of financial statement ratio analysis techniques to discover whether Kohonen's self-organizing map (SOM) is able to uncover the differences in financial structures between keiretsu and non-keiretsu firms: ad hoc financial ratios and valuation-based financial ratios. We have found some evidence that SOM enables both financial analysis techniques to recognize different financial structures between the two groups of the firms. Implications of this finding for investment decisions have been discussed.

Financial and product market integration: Responses of Japanese firms

Abstract and Key Results ▪ Growing financial and product market integration has resulted in increased pressures for changes in most developed economies. We investigate the impact of these twin drivers on changes effected by Japanese firms between 1986 and 1999. ▪ Specifically, we examine (1) how shareholdings by market investors and foreign investors and (2) export ratio impact outcomes in the form of efficiency increases, dividend payout, and leverage change. ▪ We also investigate whether the relationships differ between keiretsu and nonkeiretsu firms. ▪ Ownership by market investors was positively associated with efficiency increases and decreases in firm leverage. In addition, firm export ratio played a key role in motivating Japanese firms to increase their efficiency and firm leverage. Moreover, these relationships were more pronounced in non-keiretsu than keiretsu firms.

Bond underwriting fees and keiretsu affiliation in Japan

We examine fees on bonds issued by Japanese corporations during the 1994–2002 period. Over time, we find that fees have increased for those firms that are related to bank-led (financial) keiretsu, even after controlling for risk factors. During the same period, fees have fallen for firms not belonging to keiretsu. The higher fees for keiretsu firms were not offset by lower yields. It seems that, against the background of bond market deregulation and weaker banks, keiretsu membership has become a burden rather than an advantage.