Randall Morck, the University of Alberta and NBER; M. Deniz Yavuz, Purdue University; and Bernard Yeung, National University of Singapore
State-run Banks, Money Growth, and the Real Economy
Within countries, individual state-run banks' lending correlates with prior money growth, while otherwise similar private-sector banks' lending does not. In this paper Morck, Yavuz, and Yeung study that aggregate credit and investment growth correlate with prior money growth more strongly in economies whose banking systems are more fully state-run. Size and liquidity differences between state-run and private-sector banks do not drive these results, and further tests discount broad classes of alternative causality scenarios. Tests exploiting heterogeneity in likely political pressure on state-run banks associated with e.g. central bank independence, privatizations, and election years are consistent with a command-and-control channel of pseudo-monetary policy operating via state-run banks.
Franklin Allen, Elena Carletti, Bocconi University and CEPR, and Yaniv Grinstein, IDC Herzliya and ECGI
International Evidence on Firm Level Decisions in Response to the Crisis: Shareholders vs. Other Stakeholders
The relationship between changes in GDP and unemployment during the 2008 financial crisis differed significantly from previous experiences and across countries. Allen, Carletti, and Grinstein study firm-level decisions in France, Germany, Japan, the UK, and the U.S. They find significant differences between the response of U.S. and non-U.S. firms. U.S. firms significantly decreased their production costs relative to firms in other countries. They have also reduced debt, reduced dividend payout, and increased their cash holdings compared to firms in other countries. The differences are, in general, explained by differences in financial leverage. However, financial leverage does not explain differences between production decisions in German and U.S. firms and between Japanese and US firms. They argue that differences in firm governance between U.S. firms and firms in Germany and Japan drive these responses. U.S. firms are more prone to cut labor costs and reduce leverage compared to German firms and Japanese firms in order to achieve larger profits and a larger cash-cushion in the short-run.
Benjamin E. Hermalin, the University of California at Berkeley
Biased Monitors: Corporate Governance When Managerial Ability is Mis-Assessed
An important dimension to corporate governance is the assessment of managers. When managers vary in ability, determining who is good and who is not is vital. Moreover, knowing they will be assessed can lead those being assessed to behave in ways that make them appear better. Such signal-jamming behavior can be beneficial (e.g., an executive works harder on behalf of shareholders) or harmful (e.g., the behavior is myopic, boosting short-term performance at the expense of long-term success). In standard models of assessment, it is assumed those doing the assessing behave according to Bayes Theorem. But what if the assessors suffer from one of many well-documented cognitive biases that makes them less-than-perfect Bayesians? In this paper, Hermalin begins an exploration of that issue by considering the consequence of one such bias, the base-rate fallacy, for two of the canonical assessment models: career-concerns and optimal monitoring and replacement. Although firms can suffer due to the base-rate fallacy, they can also benefit from this bias.
Naoshi Ikeda, Kotaro Inoue, and Sho Watanabe, Tokyo Institute of Technology
Enjoying the Quiet Life: Corporate Decision-Making by Entrenched Managers
In this study, Ikeda, Inoue and Watanabe evaluate Bertrand and Mullainathan's (2003) "quiet life hypothesis," which predicts that managers who are subject to weak monitoring from the shareholders (a) avoid making difficult decisions such as risky investment and business restructuring, and (b) exert less effort than their more heavily disciplined counterparts. Authors operationalize the strength of a manager's defense against market disciplinary power with a proxy variable comprised of cross-shareholder and stable shareholder ownership. They then examine the effect of this proxy variable on manager-enacted corporate behaviors. Results of their analysis indicate that entrenched managers who are insulated from disciplinary action by friendly shareholders avoid making difficult decisions (e.g., large investments, business restructures). This avoidance, in turn, results in less risk-taking by the companies these individuals manage. However, when managers are closely monitored by institutional investors and independent directors, they tend to be active in making difficult decisions. Taken together, their results suggest that Japanese firms pay non-negligible costs for the managerial "quiet life" problem, and improved corporate governance can help to mitigate this problem.
Hideaki Miyajima and Ryo Ogawa, Waseda University, and Takuji Saito, Keio University
Changes in Corporate Governance and President Turnover: The Evidence from Japan
The study aims to shed light on how changes in the Japanese corporate governance system since the 1990s have influenced company president turnover. Miyajima, Ogawa, and Saito analyzed the determinants of president turnover between 1990 and 2013 for a random sample of 500 firms listed on the First Section of the Tokyo Stock Exchange. Though their analysis, they found that president turnover sensitivity to corporate performance has not changed, although they did find that return on equity (ROE) and stock returns displace return on assets (ROA) as performance indicators that president turnover is most sensitive to. Furthermore, while president turnover sensitivity to ROA is highest among firms believed to be heavily influenced by their main banks, firms with high foreign institutional investor shareholding ratios are more sensitive to ROE. These results are consistent with the curtailment of the scope of Japanese main banks and the increase in foreign institutional investors since the latter half of the 1990s. The influence of outside directors that had begun to increase as of the mid-2000s has varied depending on how many are on each board. The sensitivity of president turnover to performance tends to be lower in firms that have only one or two outside directors and higher in firms with three or more outside directors.
Decline of Bank-Led Restructuring in Japan: 1980-2010
Using a dataset on major corporate restructuring cases in Japan that Hoshi built with Satoshi Koibuchi and Ulrike Schaede, this paper examined how the corporate restructuring in Japan changed over time. The data shows that restructuring of distressed firms became less frequent after the 1990s. When a restructuring happens, it involves real adjustments, but the intensity of the adjustments seems to have declined during the lost decade from the early 1990s and the early 2000s. Reduced frequency and intensity of restructuring of distressed firms is consistent with what other research found in the past.