Deregulation and governance: plight of Japanese banks in the 1990s

The governance structure of public corporations is determined by the agency relationship between shareholders and managers, and the agency theory predicts that deregulation of an industry leads to governance adaptation. Deregulation of the Japanese banking business in the 1980s offers an interesting case study in this framework, as Japanese banks fell into serious solvency problems in the post-deregulation 1990s. This paper investigates whether ineffective governance was responsible for the plight of Japanese banks. The sample is 384 corporations that were listed on the Tokyo Stock Exchange between 1983 and 1990, which includes 59 banks. One of the findings is that bank shareholders allowed more diffuse ownership structure after deregulation, which demonstrates that the agency theory did not hold for shareholders of Japanese banks.