Strong Managers, Weak Owners: The Political Roots of American Corporate Finance

By Mark J. Roe | Go to book overview

CHAPTER 13
Counterpoint I

SEVERAL ARGUMENTS tend to undermine the thesis that politics was a key determinant of intermediaries and the ownership structure of the large firm. I have addressed several as they have come up. For example, some restrictions were sound and inevitable, and even some of the unsound ones had public-spirited aspirations. But political forces created enough rules, and influenced enough others, that the political theory makes sense. Several arguments, which are worth addressing separately, are variations on the theme that intermediaries would fragment their holdings anyway, despite the American political history of fragmentation. Evidence for this view includes the possibility that financial institutions in Germany and Japan will, or are, fragmenting their holdings; the fact that some of the American rules do not absolutely bar institutional involvement, but just up the cost of involvement without banning it; and financial theories that give some basis for institutional passivity irrespective of the fragmenting rules.


FRAGMENTATION EVEN WITHOUT IMPEDIMENTS?

Perhaps finance fragments anyway as a nation advances economically. This kind of statement is difficult to disprove, since those with this view can always assert that the natural economic fragmentation is just around the corner. There have been recurrent predictions of the end of the Japanese keiretsu and its main bank system, as well as of a massive sell-off of German bank–owned stock. Perhaps, the argument would run, diversification is so important that institutions will voluntarily fragment their portfolios. Perhaps there is a natural scale to intermediaries that precludes large size. Or perhaps institutions' need for liquidity is so important that they will not take large illiquid blocks.

The current facts of institutional ownership in Germany and Japan, although mixed, do not yet support the natural evolution thesis. Although the German and Japanese systems are hardly static, and the Japanese main bank system is weakening, its weaknesses have not yet shown up in big declines in stock ownership. Japanese banks' stock ownership has been stable for twenty-five years; influence via loans may be weakening, but not stock own-

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