portfolio stock return sensitivities. In Sections 3 and 4, we present the empirical methodology and results, respectively. Section 5 offers conclusions and comments.
2. The financial firms of a keiretsu as a form of corporate organization
2
.
1
. Description of the horizontal keiretsu A keiretsu is an informal grouping of Japanese firms tied together by significant
cross-holdings of equity. Horizontal financial keiretsu, the largest and most prominent keiretsu, are grouped around a city bank. Keiretsu members tend to
specialize in different businesses but often offer competing products or services. Fig. 1 summarizes the framework of a horizontal keiretsu, which has financial, indus-
trial, and trading arms, using the Mitsubishi keiretsu as an example.
There are strong economic ties among members documented in the literature and listed in the center of Fig. 1. Specifically, firms own significant amounts of stock in
other member firms. For example, banks commonly hold stock in firms to which they extend credit while borrowers, in turn, own stock in the banks. Keiretsu
members also exchange personnel regularly, especially transferring employees of financial firms to become managing directors of industrial firms. Other ties include
monthly meetings of the presidents’ council where top management of the keiretsu firms exchange information and coordinate some activities; substantial intra-group
trade; and the pursuit of joint ventures by members Hoshi, 1994. Firms may join or leave a keiretsu at management discretion but membership is typically very
stable.
Fig. 1. Example of the horizontal keiretsu corporate form – the Mitsubishi keiretsu brackets: total assets in 1992, in trillions of yen; the asterisks designate the co-leaders of the Mitsubishi keiretsu.
As noted with the Mitsubishi keiretsu in Fig. 1, several types of financial institutions are tied to each keiretsu. Cable and Yasuki 1985 document the
standard framework where each group contains a commercial city bank, trust bank, trading company, and at least one insurance company so that a full range of
financial needs can be met by group members: ‘‘The presidents’ council typically includes the top manager from the city bank, one life insurance company, one
casualty insurance company, and one or more trading companies and is instrumen- tal in keeping the group members together.’’ The ‘‘leader’’ of a financial keiretsu is
generally the city bank but there are no formal leadership roles.
2
During the 1990s, there were six horizontal keiretsu that controlled a substantial portion of economic activity within Japan. Table 1 lists the main financial institu-
tion members for each of these keiretsu. Though not often viewed explicitly as financial institutions, the trading companies assist in export and import transactions
and finance. As part of a keiretsu, they supply substantial amounts of short-term credit to the industrial firm members. Because they have intimate knowledge of
their clients’ export markets, sales prospects, and financing needs, they can often structure more effective credit agreements.
The Coase concept of a firm as a nexus of contracts enables a more effective understanding of the keiretsu form of corporate organization. The keiretsu may be
viewed as a ‘‘super-firm’’ based on a nexus of mostly implicit contractual arrange- ments. Within a keiretsu, firms maintain long-term financial and real economic ties.
According to Yoshimura and Anderson 1997, ‘‘When a company belongs to a keiretsu …, its most senior people may in some contexts consider the keiretsu to be
the reference group.’’ The substantial, interlocking web of intra-keiretsu equity holdings strengthens these ties.
Gerlach 1992 argues that financial ties are the strongest link among keiretsu firms. Substantial financial relationships and close economic ties suggest that the
financial firms of the keiretsu can be viewed as a unified economic structure. The recent financial scandals, such as the involvement of the Japanese yakuza in
property lending and practices of sokaiya, further demonstrate the subtle behind the scene relationships within Japanese corporate governance that affect keiretsu
business practices.
3
2
.
2
. The financial firms in a horizontal keiretsu as a unified economic organization The effect of the keiretsu economic form on assetliability management will not
always be transparent because each major financial institution is a separate legal
2
For instance, Mitsubishi Bank, Mitsubishi trading Corporation, and Mitsubishi Heavy Industries are cited in Dodwell Marketing Consultants, Industrial Groupings in Japan 1992 as co-leaders of the
Mitsubishi keiretsu.
3
The yakuza are the organized criminal gangs of Japan, which recent revelations indicate were heavily involved in real estate borrowing from Japanese financial institutions. Sokaiya is the practice of
blackmailing corporations so as to prevent unseemly disruptions of shareholder meetings.
T .W
. Koch
, A
. Saporoschenko
J .
of Multi
. Fin
. Manag
.
11 2001
165 –
182
169 Table 1
The component keiretsu firms for each stock return portfolio
a
Group A Keiretsu
Group B Per
ID Name
Type Per
Name Type
ID Fuji Bank
city 0.746
0.794 8317
city Fuji Bank
8317 Fuyo Group 1
Yasuda Trust trust
0.147 8404
Yasuda Trust trust
0.157 8404
Yasuda MF pc ins.
0.046 8755
0.049 Yasuda MF
pc ins. 8755
8002 Marubeni Corp.
trading 0.062
8315 8315
Mitsubishi Bank city
0.570 Mitsubishi Bank
city Mitsubishi Group 2
0.713 Mitsubishi Trust
trust 0.178
8402 0.224
trust Mitsubishi Trust
8402 Tokio MF
pins. 8751
0.050 Tokio MF
pc ins. .064
8751 Mitsubishi Corp.
trading 0.077
8058 8359
Hacinjuni Bank regional
0.058 8405
Nippon Trust trust
0.016 8584
JACCS Corp. cons cr
0.018 Nikko Securities
broker 0.030
8603 8757
Nishin MF pc ins.
0.006 Sumitomo Bank
city 0.688
0.761 city
8318 Sumitomo Group 3
8318 Sumitomo Bank
Sumitomo Trust trust
0.190 8403
Sumitomo Trust trust
0.211 8403
Sumitomo MF pc ins.
0.025 8753
0.028 pc ins.
Sumitomo MF 8753
8053 Sumitomo Corp.
trading 0.054
Daiwa Securities broker
0.043 8601
8320 8320
Sanwa Bank city
0.684 Sanwa Bank
city Sanwa Group 4
0.838 Toyo Trust
trust 0.108
8407 Toyo Trust
trust 0.132
8407 Nippon MF
pc ins. 0.024
8754 8754
0.030 pc ins.
Nippon MF 8063
Ichi trading
0.040 8004
Nichimen trading
0.021 Orix Corp.
leasing 0.040
8591 8583
Nippon Shinpan consr cr
0.083 DKB
city 0.816
8311 0.992
DKB Group 5 city
Daichi Kangyo Bk 8311
0.008 8765
Taisei MF pc ins.
0.006 Taisei MF
8765 pc ins.
C Itoh and Co. trading
0.076 8001
8585 Orient Corp.
leasing 0.093
8607 Kanaku Securities
broker 0.009
Sakura Bank city
0.707 0.770
8314 city
Sakura Bank 8314
Mitsui Group 6 0.196
8401 Mitsui Trust
trust 0.179
Mitsui Trust 8401
trust Mitsui MF
pc ins. 0.031
8752 0.034
8752 Mitsui MF
pc ins. Mitsui and Co.
trading 0.083
8031
a
Per indicates the percentage weighting for the firm stock return in each portfolio. The weights are based on the percentage of the book value of liabilities and market value of equity for each firm out of the total for a keiretsu portfolio group, based on fiscal year end 1991 data. Type indicates the financial
industry type for each firm where cons cr is the abbreviation for consumer credit firms and pc ins. for the propertycasualty insurance firms.
entity with separate management and separately traded stock but with strong informal economic and social ties. However, there are several interrelated reasons
why the keiretsu financial firms should be viewed as a unified economic structure. 1 Different financial institutions within a keiretsu may shift sell assets andor
liabilities to each other through implicit agreements more readily than to non- keiretsu firms. For instance, city banks may offer larger shares in more profitable
loan syndicates to propertycasualty and life insurance companies, which are members of the same keiretsu. Also, legal restrictions on assetliability composition
can probably be more easily evaded by shifting sales of restricted products to other members of the keiretsu, where the products are not restricted. For instance, the
now disbanded jusen housing loan companies were formed by Japanese banks to evade restrictions on real estate lending.
4
2 Keiretsu financial institutions may maintain different assetliability composi- tions than non-keiretsu financial institutions. For instance, keiretsu city banks may
make fewer short-term loans to small companies since keiretsu trading companies will provide trade finance to these companies.
3 The more complete sharing of information e.g., product market conditions, company financial conditions, technical back-office processing developments may
lower overall risk for keiretsu firms.
5
4 Three of the keiretsu have long histories of very close cooperation dating back to the family-owned zaibatsu.
6
This close cooperation may further encourage coordinated management of activities between keiretsu firms. This cooperation is
well-documented in historical accounts of keiretsu and zaibatsu. 5 There is the possibility of concerted political influence by combined group
members to achieve political favors.
7
The Keidanren, of which Japanese banks are significant members, is one of the larger contributors to the ruling Liberal Demo-
cratic Party in Japan.
8
Its influence may benefit the members of a keiretsu as a whole. This political influence may be instrumental in delaying the entrance of
competition by foreign financial institutions into Japanese domestic financial markets.
6 There is complementary marketing of financial products among keiretsu
4
The jusen were formed by the major Japanese banks in the 1970s to provide home mortgage loans to Japanese consumers. They were liquidated by the Japanese government in 1996, due to the large
number of unrecoverable real estate assets.
5
For instance, among two Mitsui group major ‘‘co-operation schemes’’ are the Mitsui Information Systems Conference and the Mitsui Inter-Business Research Institute.
6
The zaibatsu is the pre-World War II predecessor to the keiretsu form of corporate organization. It is distinguished from the keiretsu form by extensive single family ownership and member firms tending
to be grouped as subsidiaries of a conglomerate type corporation.
7
For instance, Dodwell Marketing Consultants, Industrial Groupings in Japan 1992 indicates that the members of the Mitsubishi presidents’ council make decisions on the allocation of political
contributions.
8
The Keidanren, or Japanese Federation of Economic Organizations, is an influential association of Japan’s largest corporations, which works closely with the Japanese government and political parties on
business and other policy issues.
firms. For instance, insurance companies sell their products to employees of other keiretsu firms. This complementary marketing may allow for cheaper marketing
costs and a more reliable source of revenue for keiretsu firms. As an example, Gerlach 1992 states that the employees of Japanese keiretsu commercial bank
clients often have their wages automatically transferred to savings accounts at the keiretsu commercial banks.
3. Model specification and research method
