Evolving Ownership and the Capital Structure Regime in Japan

This study is an attempt to investigate the implications of changes in ownership structure and control transfer in the Japanese corporate market—a trend attributed mainly to the government’s increasing liberalization policies during the 1990s. Our results show that firms characterized by more concentrated ownership are likely to prefer less debt as ownership concentration reduces the extent of agency costs between managers and shareholders and facilitates equity issues. The main bank system enables corporations to obtain funds easily through the debt market. Additionally, unwinding cross-shareholding between banks and corporations provides impetus for investment in relatively risky projects. The ownership pattern of private and foreign individuals is consistently associated with a shift from bank debt to equity financing. Moreover, managerial ownership reduces the risk of wasting free cash flows. Managers make fewer decisions that may have a negative effect on the firm’s value because the part of costs that they will absorb as shareholders increases as their share of capital rises. The results suggest that government ownership is associated with more pressure on management and enforces the efficient use of cash flows. Changes in ultimate ownership will likely lead to major asset and capital restructuring in the coming years.