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Shareholder Monitoring and Regulation: The Japanese Banking Experience

Economic Research Institute (82-2-759-5415) 2006.11.14 4990

Shareholder Monitoring and Regulation: The Japanese Banking Experience 

Author :  Kenneth A. Kim(School of Management, State University of New York at Buffalo), Sang-Hyop Lee(Department of Economics, University of Hawaii), and S. Ghon Rhee(College of Business Administration, University of Hawaii)

During a period where Japanese banks operated under a less restrictive regulatory environment, 1986-88, we find positive relations between bank risks and ownership concentration. This empirical evidence suggests that shareholder monitoring is present when the potential return to monitoring is high (the “shareholder monitoring hypothesis”).  During the periods before and after this particular period, which are characterized by stricter regulatory environments, we do not observe evidence of shareholder oversight.  Taken together, these results are consistent with the argument that regulation (an external governance mechanism) and shareholder monitoring (an internal governance mechanism) are substitutes for one another (the “substitution hypothesis”).  Finally, tests on bank performance lend supporting evidence to both hypotheses.