ENJOYING THE QUIET LIFE: CORPORATE DECISION-MAKING BY ENTRENCHED - - PowerPoint PPT Presentation

▶
enjoying the quiet life corporate
SMART_READER_LITE
LIVE PREVIEW

ENJOYING THE QUIET LIFE: CORPORATE DECISION-MAKING BY ENTRENCHED - - PowerPoint PPT Presentation

Aug 28, 2022 127 likes •318 views

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

slide-1
SLIDE 1

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

slide-2
SLIDE 2

Summary of the paper

  • Sample: TSE Firms from 2004 to 2014.
  • Main results:

Investments Restructuing Risk-taking

CAPEX M&A R&D Subsidiary divestiture Segment decrease SD of industry- adjusted ROA

Cross- shareholdings

  • Stable
  • wnership
  • 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

slide-3
SLIDE 3

Congratulations!

2018/2/16 QUIET LIFE by Prof. Inoue 3

slide-4
SLIDE 4

Congratulations!

2018/2/16 QUIET LIFE by Prof. Inoue 4

slide-5
SLIDE 5

Congratulations!

2018/2/16 QUIET LIFE by Prof. Inoue 5

slide-6
SLIDE 6

Why this paper is important (1/2)

It Ito Review (2 (2014), page 37:

Final Report of the Ito Review “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” Proj

  • ject (M

(Min inistry ry of

  • f Economy, Trade,

, an and Ind Industry ry) Median SD

2018/2/16 QUIET LIFE by Prof. Inoue 6

slide-7
SLIDE 7

Why this paper is important (2/2)

0.4 0.45 0.5 0.55 0.6 0.65 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Leverage (Total liabilities over assets)

Mean Median

Sam Sample: All l listed com

  • mpanies in Jap

Japan (e (exclu luding JASDAQ) Q). Da Data sou source: Nikkei i NEE EEDS Fin Financia ialQ lQuest

  • Recent Japanese

companies show extremely conservative behaviors, which potentially impede economic growth.

  • This paper attributes the

pattern to managers’ QUIET LIFE, caused by cross-shareholdings.

  • The paper highlights a

very important aspect of recent Japanese corporate governance.

2018/2/16 QUIET LIFE by Prof. Inoue 7

slide-8
SLIDE 8

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 1st 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

slide-9
SLIDE 9

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

slide-10
SLIDE 10

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

slide-11
SLIDE 11

Do Japanese managers really prefer QUIET LIFE?

History of OKI ELECTRIC INDUSTRY Page 339

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”

  • pposite 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

slide-12
SLIDE 12

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

slide-13
SLIDE 13

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

slide-14
SLIDE 14

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

slide-15
SLIDE 15

Potential alternative story

  • The results might suggest that …
  • The non-performing loan problem in the

banking sector forced Japanese companies to adopt alternative measures to prevent dismissal of their valuable practices (relationship and in-house tournament).

  • Fan and Uchida (2018) argue that Japanese

firms go public even in bear markets during credit crunch.

  • Taking conservative behaviors might be

valuable anti-bankruptcy measures at least for a subset of Japanese companies.

  • It is natural that those firms keep cross-

shareholdings as an anti-takeover measure as well as decrease leverage.

  • Sorry, return to endogeneity concern.

2018/2/16 QUIET LIFE by Prof. Inoue 15

relationships In-house tournament Bankruptcy Takeovers Main Bank Cross-shareholdings Value destroy Prevent Prevent (-1980s) Firm J

slide-16
SLIDE 16

Potential alternative story

  • The results might suggest that …
  • The non-performing loan problem in the

banking sector forced Japanese companies to adopt alternative measures to prevent dismissal of their valuable practices (relationship and in-house tournament).

  • Fan and Uchida (2018) argue that Japanese

firms go public even in bear markets during credit crunch.

  • Taking conservative behaviors might be

valuable anti-bankruptcy measures at least for a subset of Japanese companies.

  • It is natural that those firms keep cross-

shareholdings as an anti-takeover measure as well as decrease leverage.

  • Sorry, return to endogeneity concern.

2018/2/16 QUIET LIFE by Prof. Inoue 16

relationships In-house tournament Bankruptcy Takeovers Main Bank Cross-shareholdings Value destroy Non-performing loan problem Prevent Prevent (-1980s) Firm J

slide-17
SLIDE 17

Potential alternative story

  • The results might suggest that …
  • The non-performing loan problem in the

banking sector forced Japanese companies to adopt alternative measures to prevent dismissal of their valuable practices (relationship and in-house tournament).

  • Fan and Uchida (2018) argue that Japanese

firms go public even in bear markets during credit crunch.

  • Taking conservative behaviors might be

valuable anti-bankruptcy measures at least for a subset of Japanese companies.

  • It is natural that those firms keep cross-

shareholdings as an anti-takeover measure as well as decrease leverage.

  • Sorry, return to endogeneity concern.

2018/2/16 QUIET LIFE by Prof. Inoue 17

relationships In-house tournament Bankruptcy Takeovers Main Bank Cross-shareholdings Value Conservative behaviors destroy Non-performing loan problem Prevent (2000s-) Prevent Prevent (-1980s) Firm J

slide-18
SLIDE 18

Summary of my comments

  • The paper captures a very important aspect of recent Japanese

corporate governance. I really enjoyed and learned a lot.

  • However, Prof. Inoue says:
  • “analysis of longer periods of time may produce different results. This is one

limitation of our study” (page 19).

  • Yes, I agree. But the reason might be a bit different.
  • We should take closer look at the issue by taking Japanese institutional

setting into consideration. Big picture is needed to address the issue.

  • Of course, I am not sure whether keeping the conventional practices

is really value-increasing for firms with large cross-shareholdings.

  • It is extremely difficult to measure the value of Japanese firms’

conventional practices. But, I believe it will be worth to challenge.

  • Thank you so much!!

2018/2/16 QUIET LIFE by Prof. Inoue 18