Table Of ContentCAPITAL MARKETS AND
CORPORATE GOVERNANCE IN
JAPAN, GERMANY AND THE
UNITED STATES
Germany, Japan and the United States are the world’s three largest
economies. Despite their common economic success, companies in these
three countries operate within rather unique financial systems.
Germany’s financial system is characterized by weak corporate stock and
bond markets, strong universal banks and high levels of ownership
concentration. Keiretsu organizations—large corporate networks—are
the center of Japan’s financial system. The US system is dominated by
strong capital market forces. These differences raise various questions.
Why did financial keiretsu develop in Japan, but not in Germany and the
United States? Why is bank intermediation more dominant in Germany
and Japan than in the United States? What are the advantages and
disadvantages of each system?
This study answers these and related questions. It explains capital market
intermediation, holding companies, multidivisional organizations,
financial keiretsu and LBO associations as organizational responses to
capital market inefficiencies. Country-specific responses are described as
a consequence of country-specific financial regulations. Each regulatory
regime results in specific capital market inefficiencies. The book contains
a comprehensive description of German, Japanese and US regulations.
Comparative capital market and corporate data highlight the major
strengths and weaknesses of each system.
Helmut M.Dietl is Professor of Organization and International
Management at the University of Paderborn, Germany. He is coeditor
of the book series NIE—New Institutional Economics, author of Institutions
and Time (in German), and co-author of Organization—An Economic
Perspective (in German and Japanese). He has contributed to refereed
journals and published in four languages.
ROUTLEDGE STUDIES IN THE
MODERN WORLD ECONOMY
INTEREST RATES AND BUDGET DEFICITS
A Study of the Advanced Economies
Kanhaya L.Gupta and Bakhtiar Moazzami
WORLD TRADE AFTER THE URUGUAY ROUND
Prospects and Policy Options for the Twenty-First Century
Edited by Harald Sander and András Inotai
THE FLOW ANALYSIS OF LABOUR MARKETS
Edited by Ronald Schettkat
INFLATION AND UNEMPLOYMENT
Contributions to a New Macroeconomic Approach
Edited by Alvaro Cencini and Mauro Baranzini
MACROECONOMIC DIMENSIONS OF PUBLIC FINANCE
Essays in Honour of Vito Tanzi
Edited by Mario I.Blejer and Teresa M.Ter-Minassian
FISCAL POLICY AND ECONOMIC REFORMS
Essays in Honour of Vito Tanzi
Edited by Mario I.Blejer and Teresa M.Ter-Minassian
COMPETITION POLICY IN THE GLOBAL ECONOMY
Modalities for Co-operation
Edited by Leonard Waverman, William S.Comanor and Akira Goto
WORKING IN THE MACROECONOMY
A Study of the US Labor Market
Martin F.J.Prachowny
HOW DOES PRIVATIZATION WORK?
Edited by Anthony Bennett
THE ECONOMICS AND POLITICS OF INTERNATIONAL TRADE
Freedom and Trade Volume II
Edited by Gary Cook
THE LEGAL AND MORAL ASPECTS OF INTERNATIONAL TRADE
Freedom and Trade Volume III
Edited by Asif Qureshi, Hillel Steiner and Geraint Parry
CAPITAL MARKETS AND CORPORATE GOVERNANCE IN JAPAN
GERMANY AND THE UNITED STATES
Organizational Response to Market Inefficiencies
Helmut M.Dietl
CAPITAL MARKETS AND
CORPORATE
GOVERNANCE IN
JAPAN, GERMANY AND
THE UNITED STATES
Organizational Response to
Market Inefficiencies
Helmut M.Dietl
London and New York
First published 1998
by Routledge
11 New Fetter Lane, London EC4P 4EE
Simultaneously published in the USA and Canada
by Routledge
29 West 35th Street, New York, NY 10001
Routledge is an imprint of the Taylor & Francis Group
This edition published in the Taylor & Francis e-Library, 2003.
© 1998 Helmut M.Dietl
All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic,
mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in
writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the
British Library
Library of Congress Cataloguing in Publication Data
Dietl, Helmut Max
Capital markets and corporate governance in
Japan, Germany and the United
States: organizational response to market inefficiencies/
Helmut M.Dietl.
Includes bibliographical references and index.
1. Capital market—United States. 2. Capital market—Germany.
3. Capital market—Japan. 4. Corporate governance—United States.
5. Corporate governance—Germany. 6. Corporate governance—Japan.
I. Title.
HG4910. D53 1998
97–21404
332’, 041–dc21
CIP
ISBN 0-203-44896-0 Master e-book ISBN
ISBN 0-203-75720-3 (Adobe eReader Format)
ISBN 0-415-17188-1 (Print Edition)
CONTENTS
List of illustrations vi
Acknowledgements viii
Introduction 1
1 THEORETICAL FRAMEWORK 4
Investment relation 4
Investment relation costs 5
Relevant dimensions of investment relations 8
Classification of alternative regulatory environments 12
Organizational modes of capital allocation
and corporate governance 26
Discriminating match 93
2 EMPIRICAL EVIDENCE FROM GERMANY,
JAPAN AND THE UNITED STATES 111
Germany 111
Japan 132
United States 146
Conclusion 160
SUMMARY 161
Appendices 166
Notes 170
Bibliography 182
Name index 190
Subject index 193
v
ILLUSTRATIONS
FIGURES
1.1 Expected value of investment portfolios under
accurate and inaccurate knowledge 6
1.2 Categories of knowledge generated by different
kinds of event information 28
1.3 Financial benefits (losses) of corporate owners
and creditors under limited liablility 31
1.4 Ownership concentration through pyramiding 70
1.5 Organizational structure of multidivisionalized firms 73
1.6 Financial and organizational structure of
LBO associations 78
1.7 Major debt relationships within the financial
core and between the financial core and nonfinancial
keiretsu firms 83
1.8 Comparative features of alternative modes of
capital allocation and corporate governance 92
1.9 Efficiency match under neoclassical regulation 102
2.1 Efficiency match under Japan’s hybrid
regulatory environment 144
TABLES
1.1 Distinguishing features of neoclassical and relational
regulation 23
2.1 A comparison of German, Japanese and US
capital markets 121
2.2 Ownership structure of listed corporations in
Germany, Japan and the US 123
vi
ILLUSTRATIONS
2.3 Ownership concentration under relational
(Germany), hybrid (Japan) and neoclassical (US)
capital market regulation (percentages of total) 124
2.4 Statistical results for Germany 131
2.5 Cross shareholdings, internal lending, internal
trading and personal ties within Japan’s six major
financial keiretsu (1993/94) 143
2.6 Statistical results for Japan 146
2.7 Assets of six largest German, Japanese and
US banks ($ billion) 157
2.8 Statistical results for the United States 159
vii
ACKNOWLEDGEMENTS
During my research I have benefited greatly from the advice of Franklin
Allen, Harald Baum, Gary Gorton, Mitsuhiro Hirata, Akihiro Koyama,
Shuichi Manchu, Arnold Picot, Ralf Reichwald, Bernd Rudolph,
Ekkehard Wenger, Oliver E.Williamson and Wei Zhang. I want to thank
the Institute of Management, Innovation and Organization at the
University of California, Berkeley; the Finance Department of the
Wharton School of Business, University of Pennsylvania; the Institute
of Business Research at Hitotsubashi University, Tokyo; and their
respective directors David J.Teece, Richard E.Kihlstrom and Ikujiro
Nonaka for supporting my research in the United States and Japan. I am
grateful to Yufeng Chen, who typed most of the manuscript, Andreas
Schnitzer, who helped to create the illustrations, and Angela Shelley, who
edited the manuscript.
Finally, financial support from the Deutsche Forschungsgemeinschaft
(German Research Foundation) is gratefully acknowledged.
viii
INTRODUCTION
Germany, Japan, and the United States represent the world’s three largest
economies. Despite their common economic success, German, Japanese
and US companies operate within rather unique financial systems.
Germany’s financial system is dominated by large universal banks.
Markets for corporate stocks and corporate bonds are not well
developed. Corporate ownership is highly concentrated. Nonfinancial
enterprises are the most important group of shareholders.
Banks play a dominant role within the Japanese financial system.
Although they are not allowed to acquire more than 5 percent of a
corporation’s outstanding shares, Japanese banks own more than one-
fifth of all Japanese stocks. They are the center of keiretsu
organizations—large financial networks based on cross shareholdings,
short-term credits, long-term commitments, director interlinkages and
inter-firm trading.
The US capital market is well developed. Bank intermediation is less
important than in Germany and Japan. Corporate ownership is highly
fragmented. Private households constitute the largest group of
shareholders, owning about three-quarters of all US stocks. Despite the
strength of US stock and bond markets, multidivisional organization has
become popular in the United States. Like their German and Japanese
counterparts, many US corporations have created internal capital
markets by adopting a multidivisional structure. Contrary to German and
Japanese multidivisional corporations, however, US conglomerates
became the target of leveraged buyouts. During the 1980s a large
number of US corporations were restructured as a result of hostile
takeovers.
These differences raise various questions. For example, why are
holding companies popular in Germany? Why did financial keiretsu
1
