Academic journal article Academy of Strategic Management Journal

An Agency Comparison of the Keiretsu and the Japanese Independent Firm

Academic journal article Academy of Strategic Management Journal

An Agency Comparison of the Keiretsu and the Japanese Independent Firm

Article excerpt


Agency theory has been applied to the analysis of numerous organizational relationships and in various contexts. The concern of agency theory has been the conflicts that arise between agents and principals. When this theory is applied to the study of firms, this conflict becomes that between managers and the shareholders. Conflicts of interest are inherent in all contractual arrangements involving principals and agents. Whereas many of the studies of agency theory have focused on firms based in the United States, in this study we analyze a sample of Japanese firms. In our analysis, we question whether the Japanese keiretsu (or business group) experiences more agency conflict due to a lower shareholder orientation relative to a set of independent Japanese firms. We emphasize, however, that the contribution of our work is not the replication of previous findings. Although it may be beneficial to replicate agency-oriented North American studies in other environments, such efforts provide only limited insights. A comparative analysis of agency conflicts between keiretsu affiliated and independent Japanese firm has not been undertaken previously in the literature.

A keiretsu represents a horizontally and vertically connected group of businesses with interlocking board members who are senior managers of member companies. Such an organizational structure allows the keiretsu companies to influence the behavior of the membership. Companies within the keiretsu can additionally exert influence because they have minority but significantly valuable mutual ownership in each other. Keiretsu members are also reciprocally impacted because they often engage in joint ventures with each other as well as signing multilateral purchase agreements.

We speculate that lower levels of shareholder orientation and heightened agency problems in the keiretsu may emanate from a behavioral emphasis on the viability of the keiretsu community. Moreover, we emphasize that the concern of the community revolves around the protection of the weakest members of the business grouping. Whereas we presume that agency costs may arise from a collectivist predisposition in the keiretsu structure, we alternatively assume that agency conflicts may result from a self-serving motive in the Japanese independent firm. Consequently, as discussed subsequently, we contend that the Japanese independent firm does have the potential to be governed in the best interests of shareholders, but not the keiretsu company.

For the purpose of this study, we contend that more security analysts may be enticed to follow firms that are shareholder oriented, with lesser potential for agency conflict. That is because the common stocks of such firms are easier to market to potential investors (Chung & Jo, 1996; Gross, 1982). Indeed, security analysts serve as facilitators in the marketing and sales of stocks to customers. Hence, "an important responsibility of security analysts who are employed by brokerage houses is to help their organizations generate transactions with customers" (Chung & Jo, 1996, 496). Buyers of common stocks would prefer that analysts follow those firms that are shareholder oriented, with lower agency costs, since as investors they will benefit from holding the securities of such high quality firms. Moreover, because analysts provide information on the activities of managers and forecast firm performance, they can also reduce information asymmetries that may exist between investors and corporate insiders (Chung & Jo, 1996; Ferris & Sarin, 2000). Thus, as more analysts follow a firm, more information is available about the company, reducing the ability of managers to exploit private information for self-gain. In this sense, analysts also serve as external monitors of management, encouraging those activities that force a greater convergence between managerial and shareholder interests.

Hence, we use the extent of analyst following as a proxy for a shareholder-oriented firm with lower potential for agency costs. …

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