Conflicts of Interest in Japanese Insolvencies: The Problem of Bank Rescues

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Conflicts of Interest in Japanese Insolvencies: The Problem of Bank Rescues

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dc.contributor.author Miwa, Yoshiro
dc.contributor.author Ramseyer, J. Mark
dc.date.accessioned 2009-04-01T16:17:32Z
dc.date.issued 2005
dc.identifier.citation Yoshiro Miwa & J. Mark Ramseyer, Conflicts of Interest in Japanese Insolvencies: The Problem of Bank Rescues, 6 Theoretical Inq. L. 301 (2005). en
dc.identifier.issn 1565-3404 en
dc.identifier.uri http://nrs.harvard.edu/urn-3:HUL.InstRepos:2766351
dc.description.abstract Economists and legal scholars routinely posit an implicit contract between Japanese firms and their principal lender (called their "main bank"). Under this arrangement, the bank implicitly agrees to rescue the firm (through financial and managerial help) when times turn bad. Out of court, it rescues the firm from insolvency. Not only does it save the investments specific to the troubled firm, it lowers the use of costly bankruptcy proceedings and cuts the costs of those bankruptcy procedures firms do occasionally invoke. Given the creditor-shareholder conflicts of interest that arise as firms approach insolvency, such arrangements would seem unstable. Yet according to a long sociological tradition, conflicts of interest matter less in Japan than in the West. According to the emerging economic and legal tradition, Japanese economic actors do face those conflicts, but keep them in check through reputational concerns, close-knit ties, and government supervision. Using two datasets of troubled firms from the 1970s and 1980s, we ask whether Japanese main banks in fact rescue distressed borrowers. We find no evidence that they do: large Japanese firms fail; when large firms approach insolvency, main banks do not increase the share of the firm’s debt they bear; stronger ties between distressed firms and their main bank do not facilitate loans; and troubled firms do not try to preserve their main bank relationship. All told, the claim that Japanese banks ever implicitly agreed to rescue firms is sheer myth. That Japanese banks let troubled firms fail is no recent development; it has been thus for decades. Conflicts of interest do indeed matter in Japan and long have. They matter enough to prevent precisely the incentive-incompatible rescue deals that scholars in the field so routinely posit. en
dc.language.iso en_US en
dc.publisher bepress en
dc.relation.isversionof http://www.bepress.com/til/default/vol6/iss2/art2 en
dash.license LAA
dc.title Conflicts of Interest in Japanese Insolvencies: The Problem of Bank Rescues en
dc.relation.journal Theoretical Inquiries in Law en
dash.depositing.author Ramseyer, J. Mark

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