Capital market and corporate governance : growth strategy in early-twentieth-century Japan's cotton-spinning companies

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  • 資本市場と企業統治 : 近代日本の綿紡績企業における成長戦略
  • シホン シジョウ ト キギョウ トウチ : キンダイ ニホン ノ ワタ ボウセキ キギョウ ニ オケル セイチョウ センリャク

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This paper examines the influence that the capital market, where stockholders' evaluation is indicated by the stock price, exerted upon corporate governance in the cotton-spinning companies between 1903 and 1918. A panel data analysis shows that companies can be divided into two groups-those whose dividend ROE was relatively high and those whose dividend ROE was relatively low. In other words, the former companies intended to achieve secular, long-term growth, and the lat- ter tended to seek short-term profits. The analysis showed that stockholder-investors' modes of profit seeking in the capital market differed with the type of company. The stockholder-investors attached high value to long-term-growth companies' assets, but not to those of short-term-profit companies. In fact, they were only concerned with short-term-profit companies' current income. Furthermore, the paper considered the salaried managers' incentive control problem, showing that managerial remuneration in both types of companies was closely related to ROE. That is, salaried managers had to manage the company and meet stockholders' expectations. Therefore, managers maximize their own income by maximizing stockholders' income through managerial practices that help them meet stockholders' expectations.

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