Ownership structure and firm profitability in the Japanese keiretsu

Abstract Financial institutions within Japan's corporate groups, called keiretsu, are both lenders and shareholders of member firms. Current literature has failed to produce unanimity about how ownership of firms by financial institutions affects firm profitability. Competing theories propose that banks use this position as shareholder either to promote firm profitability, or to increase lending to generate interest revenue. This paper uses panel data to show that bank ownership results in profit non-maximization if the bank simultaneously holds debt in the firm. It is also shown that, despite continuing financial deregulation, the significance of ownership integration within the keiretsu has remained unchanged.

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