Kaoru Hosono

Corporate governance and research and development: Evidence from Japan

This paper investigates the effects of the ownership structure on the R&D intensity. Using the Japanese machine-manufacturing firm data from 1987 till 1998, we first found that the effects of R&D on stock market valuation and TFP growth were significantly positive in the latter half of the 1990s. Next, analyzing the determinants of the R&D intensity in 1998, we found that the shareholding ratios of large shareholders and the leverage ratios were positively correlated with R&D intensity, while the proportion of bank loans to total debt was negatively correlated with it. These results are consistent with the hypotheses that stress the disciplinary roles of large shareholders and debt. It is also consistent with a banks holdup hypothesis. Finally, comparing the results of 1998 with those of 1989, we found that the positive roles of keiretsu affiliation and cross-shareholdings disappeared during the last decade.

Fiscal Sustainability of Japan: A Dynamic Stochastic General Equilibrium Approach

The purpose of this paper is to investigate the fiscal sustainability of Japan by applying a dynamic stochastic general equilibrium model to the Japanese economy. By introducing intermediation costs into the model, we succeed in explaining the observed relationship between the interest and GDP growth rates, which is crucial in testing for sustainability. When the projected real growth rate is 2.5%, the average real interest rate becomes 2.57%, and the debt-to-GDP ratio gradually increases stochastically so that government debt is not sustainable. To recover sustainability, the primary surplus must be 0.2% of GDP.

Growth opportunities, collateral and debt structure: the case of the Japanese machine manufacturing firms

Abstract We explore the determinants of debt structure by analyzing the Japanese machine manufacturing firms’ data from 1990 through 1996. We find that firms with abundant growth opportunities and scarce collateral are likely to borrow from banks rather than to issue bonds. This is robust even if we consider the simultaneous decision of the debt composition and leverage or managerial incentive. We also find that firms with abundant growth opportunities or collateral tend to depend on equity rather than on debt. Though banks reduce the agency costs of debt for growing firms, equity costs less than bank loans for them.

Bank Lending and Firm Activities: Overcoming Identification Problems

This chapter presents an overview of the extant literature on the real impact of financial constraints, with a particular focus on financial constraints originating from adverse shocks to bank lending. While there has been significant progress in theoretical research on the causal link between negative fund supply shocks and various firm activities, there are relatively few empirical studies that successfully identify loan supply shocks. The first part of this chapter reviews the large body of literature on this topic and details how recent studies have attempted to overcome the important identification challenge of disentangling fund supply and demand shocks. Following the discussion of various attempts to overcome this challenge ranging from the use of natural experiments to the employment of extensive panel datasets, two studies by the authors of this chapter are discussed in detail, which employ a natural disaster in Japan as a natural experiment to examine the real impact of financial constraints on the capital investment and export behavior of firms.

Natural Disaster and Natural Selection

In this paper, we investigate whether natural selection works for firm exit after a massive natural disaster. By using a unique data set of more than 84,000 firms after the Tohoku Earthquake, we examined the impact of firm efficiency on firm bankruptcy both inside and outside of the earthquake-affected areas. We find that more efficient firms are less likely to go bankrupt both inside and outside of the affected areas, which indicates the existence of natural selection. However, we also find that firms located inside the earthquake-affected areas are less likely to go bankrupt than those located outside of the areas. We also applied the same methodology to the case of the Kobe Earthquake, and find qualitatively similar results.

International Transmission of the 2007–2009 Financial Crisis: Evidence from Japan

We investigate the international transmission of the 2007–2009 financial crisis to Japanese firms by examining both stock returns and changes in operating performance during the crisis. Our results indicate that Japanese firms were affected by the crisis mainly through the trade channel in both stock returns and changes in operating performance. We also find that the liquidity channel played a role in the fall of stock returns in response to the crisis and in the changes in return on assets during the first year of the crisis. We obtain weak evidence for the credit crunch channel and no evidence to support the trade finance channel.

Tax Avoidance by Capital Reduction: Evidence from corporate tax reform in Japan

Using the pro forma standard taxation system introduced in Japan on April 1, 2004 as a natural experiment, we empirically examine how firms reacted to this exogenous institutional change, which burdened all firms holding stated capital of larger than 100 million yen with additional tax payments. Then, we determine whether such a reaction (if any) systematically resulted in firm growth. Our results are as follows. First, firms that originally held capital above the threshold became more likely to reduce their capital to the threshold level, or below, after the announcement of the new tax system. Second, firms that exhibit losses, hold smaller assets, have lower liquidity, and/or would benefit more from a tax point of view by reducing their capital were more likely to do so. Third, firms that reduced their capital showed a higher exit rate and ex-post lower growth in size, as measured by total and tangible assets, number of employees, and sales. Quantitatively, firms that reduced their capital decreased their assets, employment, and sales by 15%, 11%, and 4%, respectively, on average, within two years of the capital reduction, as compared with those that did not. Fourth, while the debt-to-total assets ratio of firms that reduced their capital did not change in comparison with firms that did not do so, the former did show a relative increase in the share of total assets made up of liquid assets. These results imply that the policy-induced capital reduction had substantial negative impacts on firm growth, and resulted in firms changing the balance of their asset holdings in favor of liquid assets.

OWNERSHIP STRUCTURE AND THE RISK-RETURN PROFILES OF JAPANESE STOCKS

This paper empirically investigates how ownership structure of Japanese firms affects the risk-return profiles of their stocks. We find significant relationships between ownership and firms’ operational performance, i.e., the ownership of financial institutions is associated with poor performance while the ownership of large shareholders is associated with the opposite. However, comparing the returns on portfolios sorted by ownership, we find no significant relationships between ownership and the rates of returns. Specifically, excess returns are insignificant after controlling for three risk factors (i.e., market, size, and value) while factor loadings are significantly different across portfolios, i.e., the ownership of financial institutions is associated with low-risk, low-return portfolios while the ownership of large shareholders is associated with the opposite.