Silent Large Shareholders and Entrenched Bank Management Evidence from the Banking Crisis i.pdf

1 Silent Large Shareholders and Entrenched Bank Management: Evidence from the Banking Crisis in Japan Masaharu Hanazaki*, Toshiyuki Souma**, Yupana Wiwattanakantang***, *, ***Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo 186-8603, JAPAN ** Faculty of Economics, Kyoto Gakuen University, Nanjo, Sogabe-cho, Kameoka, Kyoto 621-8555, JAPAN August 2003 Abstract Since the beginning of the 1990s, Japanese banks became saddled with huge amounts of non-performing loans and a significant number of them have failed. We investigate the cause of this banking crisis that has jeopardized the stability of the financial and economic system. Following Hanazaki and Horiuchi (2001), we argue that the deficiency of effective corporate governance of banks in Japan has caused inefficient management. Our focus here is the role of largest shareholders who happen to be banks and insurers. We argue that these large shareholders appear to collude or conspire with management instead of being tough monitors. Consequently, the management became entrenched. Our empirical results show that during the 1980s these “entrenched banks” extended more lending. Even after the collapse of the bubble in the 1990s, they did not dramatically undertake restructur ing to cope with the accumulated bad loans. JEL classification: G21; G33; G38 Keywords: Corporate Governance; Ownership Structure; Managerial Entrenchment; Shareholders Activism We are grateful to Stijn Claessens, Florencio Lopez-de-Silanes, Randall Morck, Andreas Savva, and audiences at the 3nd Asian Corporate Governance Conference in Seoul for helpful comments. We would like to thank Yoko Oguro, Chikako Tamura, and Chizuko Tsutsumi for providing excellent research assistance. *Corresponding author. E-mail: hanazaki@ier.hit-u.ac.jp. 2 1. Introduction Japan’s current bank ing problems, which are thought to be closely r