The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies

By Masahiko Aoki; Hugh Patrick | Go to book overview

4 Monitoring Characteristics of the Main Bank System: An Analytical and Developmental View

Masahiko Aoki

Transactions involving investible funds between investors (the suppliers of funds in the form of equity or credit) and an industrial firm undertaking a business project entails a substantial degree of information asymmetry and imperfection. First, investors may not be as well informed as the firm regarding the technological and marketing opportunities which define the outcome of a project (the adverse selection problem). Second, managers of the firm themselves may not necessarily be in an advantageous position with regard to information if the financial returns of the project depend upon coordinated undertakings of complementary projects by other firms (the coordination problem). Third, a manager's promise to use the funds for a certain profitable purpose may not be fulfilled because of manager (or worker) incompetence or morally hazardous behaviour hidden behind uncontrollable stochastic events (the moral hazard problem).

To cope with these problems, there need to be mechanisms for assessing the credit-worthiness of proposed projects; tracking the use of funds; distinguishing misuse from temporary bad luck and correcting it; as well as credible commitment to penalizing misuse as a safeguard against future misuse (the commitment problem). Thus, the supply of financial resources requires a substantial degree of concomitant information collection—monitoring—by investors before and after the actual investment, as well as their participation in controlling the firm (the corporate governance issue).

Corporate monitoring and control is only possible, however, with special expertise, concentrated resources, and a sufficiently broad scope in terms of cross-sectional coverage as well as time horizon. In capitalist economies a variety of financial intermediaries and agents specializing in corporate monitoring and control have emerged. They include investment

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