K.U.Leuven - Departement toegepaste economische wetenschappen
DTEW Research Report 0042 pages:1-42
We test how keiretsu membership affects the Fama and French (1999) required IRR on value (or cost of capital) and the IRR on cost (or return on investment), 1974-95, of all listed non-financials in Japan. Rather than computing point estimates from aggregate data, we employ non-linear cross-sectional regression analysis of individual-firm data and we control for industry and size factors in returns. We find that firms have added value - and significantly so - regardless of industry, size, and governance system. In terms of cost in capital, we find no evidence of a keiretsu advantage. In fact, within the segment of medium- and small-sized firms the keiretsu ones often have the higher expected return on value. In terms of return on investment, mid- and low-cap firms show no clear difference but top-league keiretsu firms notched up definitely lower numbers than did comparable non-keiretsu ones. Our interpretation is that keiretsu groups have cross-subsidized their larger member firms, a strategy that led the latter to over-invest.