Corporate shareholding in Japan

This dissertation investigates why a substantial number of common stocks is held by companies in many countries, especially in Japan. Chapter 1 gives an overview of historical and legal issues regarding corporate shareholding in Japan. Chapter 2 reviews how researchers have, theoretically and empirically, approached corporate shareholding issues. Chapter 3 elaborates on a corporate shareholding model which incorporates a standard principal-agent model with Aoki's managerial risk sharing argument (Aoki, 1988). The model finds that a risk-averse manager of a firm invests in other firms if managerial reward is linked with the value of the firm she manages, and if the operating profits of investing and invested firms are negatively correlated. Corporate stock investment is larger if the invested (and/or investing) company's operating profit is less volatile and/or if the covariance in the operating profits of the companies is more strongly negative. Although a stronger link between corporate performance and managerial reward increases managers' incentive to exert efforts, it also increases the risk that managers must bear. If the risk is too high, managers would leave their companies. Corporate stock investment reduces the risk, and enables shareholders to offer a higher incentive to the managers and to earn a higher (expected) income. Chapter 4 examines three major arguments concerning the rationale behind the practice of corporate shareholding: the competitive-effect, risk-sharing, and control-rights arguments. Predictions drawn from those arguments are tested using panel data of 186 Japanese corporate group firms from 1980 to 1988. The main findings of this study are as follows. (1) The competitive-effect argument is clearly supported by the data. Firms in the same industry do tend to invest more in one another. (2) The evidence in favor of the risksharing argument is weaker — although firms with less risky operating profits tend to attract more investment, the relationship between investment and the covariance in the firms' operating profits is ambiguous. (3) The strongest empirical support is given to the control-rights argument. Indeed, the evidence confirms that a firm is more likely to invest in other firms that hold more of its own shares. Chapter 5 concludes this dissertation.Arts, Faculty ofVancouver School of EconomicsGraduat