The Law and Structure of the International Financial System: Regulation in the United States, EEC, and Japan

By John H. Friedland | Go to book overview

4
A Comparative Analysis of the Legal Structure of Corporate Finance in the United States and Japan

No issue in international relations is more in evidence than the trade friction and economic competitiveness of the United States and Japan. Too frequently, this subject has been argued in terms of trade law, fair trade, the General Agreement on Tariffs and Trade, and other matters relating to the trade of goods and services. Far less frequently has a comparative examination of the structure of corporate governance and finance in the United States and Japan been undertaken. When this approach is used, it has generally centered on the unfair oligopolistic structure of the Japanese Keiretsu, leading the observant student of international finance to conclude that the United States had better take protectionist measures. It is the thesis of this chapter that the corporate financial structure of Japanese and US firms are indeed very different, but that these differences point toward the need for harmonization of laws governing financial reporting, public disclosure and financial affiliation.

This chapter is divided into five parts: Part I surveys the interplay of monetary policy, financial regulation, and the cost of capital, and sets the stage for the assertion that inequities in the world capital market produce different costs of capital and may in the long run create disequilibrium. Part II considers the capital market structure, the comparative capital markets of Japan and the United States in terms of size and investors, discusses the role of institutional investors in the United States and Japan, and considers the degree of institutional monitoring that occurs in Japan, and the argument for institutional monitoring in the United States. While the costs of financial distress in each system cannot be adequately weighed, the inevitable consequences of the organization of Japanese capital markets is to provide maximum capital formation enabling the increase of market share at the expense of financial market stability. Part III examines the impact of Japanese capital markets on US capital markets, and the precautions which can and cannot be taken to protect the US domestic capital

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