Corporate Governance and Performance in Twentieth- Century Japan

To understand the corporate performance of Japanese firms in the twentieth century, we have constructed a comprehensive database that includes asset, capital composition, profitability, and other variables relating to corporate governance structure. In this paper, we briefly introduce our project and report preliminary results of research on corporate performance and its determinants. We surveyed the long-term transition of ROA (defined as the ratio of profit after tax reduction to total assets) and its standard deviation using micro data of Japanese firms through the twentieth century, and investigate the effect of corporate governance structure (large shareholder and main bank) and the role of corporate groups (zaibatsu and keiretsu) on ROA and its volatility. Preliminary results show that high ROA with high volatility characterized the performance of large firms in the prewar period, while relatively low profitability with less volatility characterized the post-war era. In the 1990s, however, Japanese corporations showed extraordinarily low levels of performance with high volatility. The large shareholder enhanced firm performance in the prewar period. In contrast, zaibatsu did not enhance their affiliates’ performance, nor did keiretsu and the main bank in the postwar period. Keiretsu group affiliation increased growth at the expense of profitability in the postwar period. Finally, zaibatsu in the prewar, and the main bank and keiretsu system in the postwar period both reduced the volatility of performance. This stabilizing effect was partly brought about by risk or profit sharing, and partly by strict monitoring (zaibatsu) and rent extraction (main bank). The main bank system and keiretsu systems lost the ability to reduce the volatility of performance in the 1990s.