Japan’s prolonged economic problems are due to more than faulty macro-economic policies. We do not deny the importance of bungled macro-economic policy, but argue that deeper maladies in Japanese corporate governance made that country increasingly vulnerable to such problems. We argue that Japan’s main bank and financial keiretsu systems left corporate governance largely in the hands of creditors rather than shareholders. Thus, Japanese governance practices did not assign effective control rights to residual claimants. This, we argue, led to a widespread misallocation of capital that mired Japan in excess capacity and liquidity problems. 1.

Finance Association. The data collection assistance of Madhurima Bhutkar and Sunny Khan is appreciated. 1 Banking Crisis and Mergers – The Case of Japan In contexts where banks have strong control over firms, banking crisis may be associated with merger activity. This is because banks ’ risk is reduced when their clients merge, and financial trouble creates strong incentive for banks to facilitate mergers of clients to improve banks ’ risk standing. During Japan’s banking crisis in the 1990s, corporate merger activity was correlated with banks ’ financial trouble. Banks of merger firms were unhealthy, and on average gained positive abnormal returns upon announcements of mergers between their clients. Wealth gain to banks partially stemmed from acquirer pre-merger slack, which could be used postmerger to redeem bank loans to the total merged firms. (JEL G21, G34, N25)

Abstract: We use the unique circumstances that led to the Panic of 1907 to analyze its consequences for non-financial corporations. The panic was triggered by a shock to New York’s trust companies that was unrelated to any major non-financial corporations affiliated with those institutions. Using newly collected data, we find that corporations with close ties to the trust companies that faced severe runs experienced an immediate decline in their stock price, and performed worse in the years following the panic: they earned fewer profits and paid fewer dividends, and faced higher interest rates on their debt.