ENJOYING THE QUIET LIFE: CORPORATE DECISION-MAKING BY ENTRENCHED MANAGERS Discussed by Konari Uchida Kyushu University / University of Utah Japan Economic Seminar Center on Japanese Economy and Business, Columbia Business School 2018/2/16 QUIET LIFE by Prof. Inoue 1
Summary of the paper • Sample: TSE Firms from 2004 to 2014. • Main results: Investments Restructuing Risk-taking CAPEX M&A R&D Subsidiary Segment SD of industry- divestiture decrease adjusted ROA Cross- - - - - - - shareholdings Stable - - - - - ownership • The effect of cross-shareholdings is also supported by: • Propensity score matching • IV regression • Institutional shareholders mitigate the effect of cross-shareholdings. • Conclusion: Japanese managers, entrenched by cross-shareholdings, enjoy QUIET LIFE. 2018/2/16 QUIET LIFE by Prof. Inoue 2
Congratulations! 2018/2/16 QUIET LIFE by Prof. Inoue 3
Congratulations! 2018/2/16 QUIET LIFE by Prof. Inoue 4
Congratulations! 2018/2/16 QUIET LIFE by Prof. Inoue 5
Why this paper is important (1/2) Ito Review (2 It (2014), page 37: Median SD Final Report of the Ito Review “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” Proj oject (M (Min inistry ry of of Economy, Trade, , an and Ind Industry ry) 2018/2/16 QUIET LIFE by Prof. Inoue 6
Why this paper is important (2/2) Leverage (Total liabilities over assets) • Recent Japanese 0.65 companies show extremely conservative 0.6 behaviors, which potentially impede 0.55 economic growth. • This paper attributes the 0.5 pattern to managers’ QUIET LIFE, caused by 0.45 cross-shareholdings. • 0.4 The paper highlights a 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 very important aspect of Mean Median recent Japanese Sam Sample: All l listed com ompanies in Jap Japan (e (exclu luding JASDAQ) Q). corporate governance. Da Data sou source: Nikkei i NEE EEDS Fin Financia ialQ lQuest 2018/2/16 QUIET LIFE by Prof. Inoue 7
Specific (mostly minor) comments on the paper • Does the evidence really show “under - investments”? (discussed later again) • Endogeneity concerns (discussed theoretical concerns later): • Why not Diff-in-Diffs analyses surrounding an exogenous shock (e.g., Limitation on Bank Shareholdings)? • Want to see estimation results of cross-shareholdings used in propensity score matching • IV regression: Want to see the 1 st stage result. Should present over-identification test result (two instrumental variables are needed). Do not need to use GMM IV? Show Pagan-Hall test result. • Cross-shareholdings are now small. Does it really serve as an effective anti- takeover measure? • Why not include the Inst and SO themselves in the estimation of Table 7? • Want to see more information on attributes of Industry Group cross- shareholdings (Table 10). 2018/2/16 QUIET LIFE by Prof. Inoue 8
What I would like to talk: • Since the paper is already published, I would like to propose future works, which I believe all Japan researchers should think about. • Main points: • I agree that firms with cross-shareholdings tend to take conservative behaviors (small investments; less frequent restructuring; small risk-taking). • But , I am not sure whether the pattern is really explained by “QUIET LIFE”, which cross-shareholdings allow managers to enjoy. • I would like to discuss: • Do Japanese managers really prefer QUIET LIFE under the institutional setting (e.g., in-house tournament for top manager and relation-based transactions)? • Have cross-shareholdings always enhanced conservative behaviors over the past 50 years? The effect might depend on environment. Why?? • Are the conservative behaviors really value-destroying (under-investment)? • I think there is still room for alternative stories. 2018/2/16 QUIET LIFE by Prof. Inoue 9
Do Japanese managers really prefer QUIET LIFE? • Yes, it might be the case. • Most Japanese managers are insiders promoted from the employee position. • They are winners of very long in-house tournament (promotion race). • BTW, the tournament incentives might create competitive advantage. • Coles and Uchida (2018) show evidence that firms with many junior inside directors replace management frequently, and those firms show good performance. • They may want to do nothing after reaching the top. • However,… 2018/2/16 QUIET LIFE by Prof. Inoue 10
Do Japanese managers really prefer QUIET LIFE? History of OKI ELECTRIC Page 339 INDUSTRY President Shinozuka launched the following measures to restructure the firm right after taking the seat (Sept., 1998): 1. Exit from leading- edge general purpose DRAM… 2. Cut fixed costs by layoffs and optimization of personnel expenses. 3. Closure of Chichibu Factory … 4. Closure of non- performing oversea subsidiaries… See: https://www.oki.com/jp/profile/history/120y.html “Enterprising Spirit” opposite to QUIET LIFE My conjecture: At least some Japanese managers may want to leave his mark on the corporate history by doing something difficult. 2018/2/16 QUIET LIFE by Prof. Inoue 11
Do Japanese managers really prefer QUIET LIFE? • How about non-top manager directors under the tournament? • Top managers might want to do nothing. • However, non-top manager directors are still competing each other for next top manager position. • The tournament should incentivize non-top manager directors to conduct big projects to show their ability. • Kini and Williams (2011) argue that higher tournament incentives (proxied by pay gap between CEO and next-layer senior managers) result in greater risk-taking by senior managers. • In the in-house tournament, it should be important to let them manage projects to judge who is the best for next top manager. • In sum, we should discuss more on whether Japanese managers really prefer QUIET LIFE, taking the institutional setting into consideration. 2018/2/16 QUIET LIFE by Prof. Inoue 12
Have cross-shareholdings always induced quiet life? • IN-OUT M&As in 1980 – 90s: • Daiei acquired Ala Moana Shopping Center. • Mitsubishi Estate acquired Rockfeller Center. • Matsushita acquired MCA. • Sony acquired Columbia Pictures. • Late 1980s is the peak of cross-shareholdings. Large firms already took a distance from banks. • Characterized by weak corporate governance. • Those cases make me skeptical about the idea that Japanese managers pursue quiet life when the firm is released from disciplinary forces in the capital market. • Free cash flow problems have existed before!! Why changed?? 2018/2/16 QUIET LIFE by Prof. Inoue 13
Anything wrong with being conservative?? • Is being conservative really value-decreasing? • I do not think the paper presents convincing evidence about that. • Conventional wisdom on the Japanese corporate governance: • Relationship-based transactions create value. • Tournament incentives might create value (Coles and Uchida, 2018). • Japanese firms should avoid bankruptcy and hostile takeovers, which destroy value of those practices. • Traditionally, cross-shareholdings and main banks prevented firms from going bankruptcy and being a takeover target. • Institutional complementarity has existed between those practices. • However, presence of main banks have significantly declined since the 1990s. 2018/2/16 QUIET LIFE by Prof. Inoue 14
Potential alternative story Firm J Value • The results might suggest that … • The non-performing loan problem in the In-house banking sector forced Japanese companies tournament to adopt alternative measures to prevent dismissal of their valuable practices relationships (relationship and in-house tournament). destroy • Fan and Uchida (2018) argue that Japanese firms go public even in bear markets during Bankruptcy credit crunch. Takeovers • Taking conservative behaviors might be valuable anti-bankruptcy measures at least Prevent for a subset of Japanese companies. Prevent (-1980s) • It is natural that those firms keep cross- shareholdings as an anti-takeover measure as well as decrease leverage. Main Bank Cross-shareholdings • Sorry, return to endogeneity concern. 2018/2/16 QUIET LIFE by Prof. Inoue 15
Potential alternative story Firm J Value • The results might suggest that … • The non-performing loan problem in the In-house banking sector forced Japanese companies tournament to adopt alternative measures to prevent dismissal of their valuable practices relationships (relationship and in-house tournament). destroy • Fan and Uchida (2018) argue that Japanese firms go public even in bear markets during Bankruptcy credit crunch. Takeovers • Taking conservative behaviors might be Non-performing valuable anti-bankruptcy measures at least loan problem Prevent for a subset of Japanese companies. Prevent (-1980s) • It is natural that those firms keep cross- shareholdings as an anti-takeover measure as well as decrease leverage. Main Bank Cross-shareholdings • Sorry, return to endogeneity concern. 2018/2/16 QUIET LIFE by Prof. Inoue 16
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