K.U.Leuven - Departement toegepaste economische wetenschappen
DTEW Research Report 9926 pages:1-54
The paper documents that for 1974-95 the Japanese non-financials' return on cost, a measure of return on (direct) investment, is consistently higher than their return on value (an estimate of the expected return or cost of capital). Against conventional wisdom, when translated into USD terms, the Japanese cost of capital is actually higher than the U.S. counterpart. The paper further shows that as of the 90s the main-bank centered keirestu firms, with their internally disciplined corporate governance system, lost their traditional advantage of lower cost of capital, compared to the non-keiretsu firms. Examining corporate earnings, investment, and forms of financing reveals that, in recent years, keiretsu firms have become more liquidity constrained than non-keiretsu firms. Their investment drops dramatically, and while (also much reduced) retained cash earnings provide most of the financing, debt financing is replaced by more expensive new equity as the major source of outside financing. Non-keiretsu firms are suffering as well, but to a lesser degree, and are still able to finance their investment even with substantial short-term debts. The main-bank system seems starting to crumble following an over-investment episode in late-80s.