The relevance of keiretsu affiliation on disclosure quality in contemporary Japanese economy

ABSTRACT

Corporate governance reforms were introduced in Japan in the 2000s to improve investor protection and disclosure quality. Given the importance of keiretsu-affiliated firms in the Japanese economy, our study investigates the association between keiretsu affiliation and disclosure quality. We find no systematic difference in disclosure quality between listed Japanese keiretsu and non-keiretsu-affiliated firms. Instead, we find that disclosure quality is positively associated with firm size, profitability, directors’ share ownership, overseas sales, and access to international capital. Moreover, no gap in disclosure quality between old keiretsu firms with zaibatsu heritage and post-war emerging keiretsu firms is observed.

KEYWORDS:

• Keiretsu
• Japan
• disclosure quality
• corporate governance
• matching analysis

Acknowledgments

I would like to thank the participants of the graduate accounting seminar classes in Nagoya University for all their helpful comments and suggestions to improve previous versions of this paper.

Notes

1. In 1999, the top 30 companies from Mitsubishi keiretsu alone generated $400 billion in revenues, representing 8% of Japan’s total output (Businessweek 1999).

2. The keiretsu network is often regarded as one of the major contributors of the global competitiveness of the Japanese industry, where keiretsu affiliates accounted for approximately 4% of the employment, 13% of the assets, 15% of the capital, 14% of the sales, and 12% of the profits of all Japanese firms in the 1990s (Peng, Lee, and Tan 2002).

3. Intragroup cross-shareholding is prevalent in the six major keiretsus, where an average of 14.5% of shares is reciprocally held by group members. Intragroup transactions also represent a significant part of the six keiretsu groups’ total sales: Mitsui, 44.2%; Mitsubishi, 51.7%; Sumitomo, 60.8%; Fuyo, 29.3%; Sanwa, 27.6%; and Dai Ichi Kangyo, 32.8% (Milhaupt 2002).

4. In 2001, Sumitomo Bank and Sakura/Mitsui Bank consolidated into Sumitomo Mitsui Banking Corporation. In the following year, Fuji Bank, Dai-ichi Kangyo Bank, and the Industrial Bank of Japan merged into Mizuho Bank in 2002. The last major merger occurred in 2005, where Mitsubishi Tokyo Financial Group and UFJ Holdings formed the Mitsubishi UFJ Financial Group. These mergers altered the structure of major keiretsu groups (Toya 2000).