Major Common Themes: 2005

IV. New Financial Market Architecture and Corporate Governance

Toward the creation of a new financial system, RIETI seeks to establish a theoretical framework that goes beyond the conventional direct-versus-indirect finance approach thereby studying asset securitization and liquidity, corporate governance, small business finance, and public finance within that framework.

IV-(1) New analytical framework for designing financial architecture

26. A Study of Corporate Finance

Leading Fellow(s)

Overview

In Japan, empirical studies of corporate finance have been limited to analyses using aggregate data or studies of major corporations because it is difficult to obtain firm-level data. From the standpoint of policy, it is extremely important to get an accurate picture of the flow of funds to smaller businesses, about which little has been known until now.

Using statistics from the Small and Medium Enterprise Agency and databases available for the first time, and calling on the insights and viewpoints of business leaders, a team consisting of about 10 members, including university professors, think tank researchers, and civil servants, will conduct an empirical analysis of the financial circumstances of small and medium enterprises.

Specifically, it will test the smoothing hypothesis and the zombie hypothesis to explain the fact that the default probability of small and medium-size businesses does not reflect the interest rates set by financial institutions; it will examine the role of collateral and personal guarantees in loans to small businesses, as well as the role of the public credit guarantee system.

Major Research Results

RIETI Discussion Papers

RIETI Policy Symposium

27. A Study of Regional Finance

Leading Fellow(s)

Overview

Although the Japanese economy as a whole is on the road to recovery, economic conditions in rural prefectures remain grim owing to the decline in public works projects and continued concentration of economic functions in large cities. When one also considers depopulation of rural areas, globalization and the rise of the information society, and ongoing discussions of merging municipalities and adopting a state system, one confronts the possibility that the economic landscape of Japan's rural regions could be dramatically altered. Given this climate, it has become increasingly difficult to maintain the traditional business model of Japan's regional financial institutions, and the need has arisen to consider the future of regional finance from a long-range perspective.

With this in mind, the current project will examine a wide range of issues, including the significance of a commitment by financial institutions to their local communities in terms of business management, the relationship between the growth potential of a regional economy and the business performance of its financial institutions, the merits of relationship banking from businesses' standpoint, and recent developments in community banking in Europe and the United States.

Major Research Results

RIETI Discussion Papers

RIETI Policy Discussion Papers

RIETI Policy Symposium

IV-(2) Institutional differences between banking systems and capital markets

28. A Study of Liquidity and Liquidation/Securitization

Leading Fellow(s)

Overview

With the decline of Japanese financial institutions' intermediating role in financing, advancing the process of asset liquidation and securitization has taken on great importance. This is pertinent not only to the need to encourage corporate innovation but also to such issues as asset deflation and the revitalization of regional economies. It is also an important theme in terms of improving the functioning of the financial market of East Asia as a whole.

This project will go beyond the traditional analytical framework of direct versus indirect financing - while keeping in mind the differences this distinction imply in terms of the individual institutional infrastructures required - and examine the potential role of liquidation and securitization by conducting the following research:
(1) Explaining and analyzing liquidity and liquidation from an economic standpoint -specifically, the difference between direct and indirect finance, the meaning of liquidity demand, evaluation of methods of liquidation, et cetera;
(2) analyzing trends in securitization and corporate value, market function, et cetera in order to better understand the situation in Japan with regard to liquidation and securitization and to suggest improvements, focusing specifically on real estate investment trusts or REITs (securitization of real estate), and to consider policies (including legislation, judicial precedents, monitoring system, et cetera) to promote liquidation and securitization; and
(3) with respect to vehicles for liquidation, conducting an economic analysis of the issues surrounding the appropriate mechanism for the liquidation of intellectual property from the standpoint of corporate law, accounting systems, et cetera.

Major Research Results

RIETI Discussion Papers

RIETI Policy Symposium

IV-(3) Where is Japanese corporate governance heading?

29. A Study of Corporate Governance

Leading Fellow(s)

Overview

Japanese companies have responded to the changing macroeconomic environment and rapid deregulation and institutional reform by undertaking a large-scale experiment to select a corporate governance structure that meets their current needs. The major objectives of this research team are to assess the state of corporate governance reforms in recent years and to measure the effect of these reforms on corporate performance. The following questions will be addressed:

(1) What are the changes that have occurred to the corporate governance structure of Japanese companies (board of directors and compensation system, business-bank relationship, and ownership structure)?
(2) What effect do differences in governance structure have on corporate reorganization? (The challenge of restructuring businesses and organizations is one faced by all mature economies.)
(3) Is the trend toward M&A and corporate reorganization contributing to greater corporate value and efficiency? Which types of M&A and reorganization are most effective?
(4) What impact will the trend toward M&A and corporate reorganization have on the evolution of Japanese corporate governance?
(5) Is there anything special about the relationships between business reorganization, M&A, and corporate governance of Japanese corporations when seen from an international perspective?

Major Research Results

RIETI Discussion Papers

RIETI Policy Symposium

30. Governance of Banks: From a Perspective of Depositor Discipline

Leading Fellow(s)

Overview

Japan's main banks long played a central role in corporate governance by monitoring their borrowers. The banks, in turn, were monitored by finance regulations and regulatory authorities. However, as banking crises broke out around the world, it became apparent that governance by the regulatory authorities was often insufficient. As a result, market discipline has come to be regarded as an important supplement to such government monitoring, as seen for example in the new BIS regulations. In Japan's case, since the lifting of the freeze on the limited refund system in fiscal 2005, the role of depositor discipline has been highly expected.

This study will use panel data from banks in countries around the world, including Japan (about 60 countries overall), to determine theoretically and empirically how the degree of difference in depositor discipline in each country corresponds to differences in those countries' institutional arrangements (bank regulations, et cetera). It will also focus on certain countries to analyze differences in depositor discipline before and after regulatory changes in those countries.

Major Research Results

RIETI Discussion Papers

31. Corporate Reorganization and Revitalization in Japan

Leading Fellow(s)

Overview

This project will focus on the determinants of post-workout performance of companies undergoing private restructurings through debt forgiveness by banks or court-ordered reorganizations under the Civil Rehabilitation Law, and will ask the question: What is the role of discipline imposed by rehabilitation funds in corporate rehabilitations involving non-removal of management? Empirical analysis will be used to analyze the impact of such measures as DIP (debtor in possession), debt restructuring, majority stock acquisition, and acquisition of majority seats on a board of directors. The project will then compare U.S. experiences in corporate rehabilitation in the 1980s and the current situation in Japan. Based on this, the project will identify problems in industry revitalization related to corporate revitalization and will propose measures for the future.

Major Research Results

RIETI Discussion Papers

32. Corporate Reorganization and Revitalization in Asia

Leading Fellow(s)

Overview

Fragility of corporate governance is cited as one of the causes of the Asian currency crisis. Based on joint studies of Thailand and Korea, this project will analyze the impact of corporate governance reform, particularly changes made in ownership and control in family businesses, on the revitalization of companies that failed during the currency crisis. Using this approach, this project will reexamine the various problems of corporate governance in East Asia and derive lessons that may be applied to the restructuring of state-owned enterprises and reform of banks in China.

Major Research Results

33. Governance of Japanese Companies: Opening Up the Black Box

Leading Fellow(s)

Overview

The first feature of this study is to examine the actual state of corporate governance from two perspectives: a "sovereignty theory" focusing on which stakeholder group holds the sovereignty or primacy over others, and a "mechanism theory" focusing on the monitoring of management. The latter, "mechanism theory" could focus on two aspects ? structure and process.? Until now, discussions on corporate governance have been primarily based upon the "structural mechanism theory," while the "sovereignty theory" and the "process mechanism theory" have mostly remained a blind spot, or a black box. Opening up this black box is the focus of this study. In other words, the central questions of this study are: "To whom companies belong?" and "What is happening in the process of disciplining corporate managers (the appointment and discharge of corporate managers as well as the monitoring of decision making)?"

The second feature of this study is to seek answers to these two questions in what can be described as "manager subjectivity approach." The term "manager subjectivity" is to focus on how corporate managers recognize or experience the above two questions. More specifically, with respect to the sovereignty theory, the focus is on how corporate managers recognize the sovereignty. With respect to the mechanism theory, the study looks into the process in which corporate managers perceive and process (experience) the effects imposed by various monitoring entities, rather than the process in which main banks or board members monitor corporate managers. Both of these are an attempt to open up the black box or the heart of corporate managers in the real world.

As such, this study aims to clarify the actual state of governance of Japanese companies by opening up the two black boxes, (1) the sovereignty and process mechanism theories, and (2) the thoughts within the heart of corporate managers.

Major Research Results

RIETI Discussion Papers

34. A Study on the Relationships Between Intangible Assets and Corporations' Value-Creating Potential

Leading Fellow(s)

Overview

With globalization and technological innovation accelerating, our economies are also rapidly shifting to a knowledge-based economy. Consequently corporations are more exposed to a fiercely intensifying knowledge-based competition for survival. This evolution in the environment of corporations has been promoting knowledge-oriented joint ventures, partnerships, and mergers that are designed to bring complementary intangible resources together and create a leveraged value.

In this context, it is important to understand the complex relationships between a corporation's value-creating potential and its intangible assets or intellectual assets both for corporate executives seeking a competitive advantage and for policymakers seeking to enhance the value-creating potential of society as a whole. The aim of this project is to build a framework for understanding the fundamental and important relationships, and to explore the subject from a new perspective. More particularly, the study will seek to formulate a conceptual and practical framework for gauging the contribution of intangible assets to value-creating potential for business management on one side and for macroeconomic management on the other side. If it is possible, the team will develop a methodology for quantifying the relationship. In addition, this project will uncover desirable means of information disclosure of intangible assets.

Major Research Results

RIETI Discussion Papers

RIETI Policy Symposium

*Title Abbreviation SF: Senior Fellow / F: Fellow / FF: Faculty Fellow / CF: Consulting Fellow