Nec Case Essay

19103 Words 77 Pages
Keiretsu Membership, Firm Size, and Corporate Returns on Value and Cost∗
Xueping Wu† , Piet Sercu‡ and Charles Chen§
First draft: November 1998; this version: October 2000



Jun Yao and Shu-Chuen Chong provided helpful research assistance. The authors thank Kathryn
Dewenter, Amar Gande, Larry Goldberg, Ser-Huang Poon, Kazunori Suzuki, and other participants at the 1999 WFA and 2000 EFA Conferences and workshops at HKUST, K.U.Leuven, and Strathclyde; and
Yasushi Hamao, Nancy Huyghebaert, Shuhe Li, Xijia Su, Linda Van de Gucht, and Cynthia Van Hulle for useful discussions or comments that have substantially improved content as well as presentation.
All remaining errors are the authors’.

City University of Hong Kong,
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Our interpretation is that keiretsu groups have cross-subsidized their larger member firms, a strategy that led the latter to over-invest.

Keiretsu Membership, Size, and Returns on Value and Cost

Introduction
An important issue in corporate finance is how firms perform under different systems of corporate governance and financing, and whether one governance system stands out as superior.
Under the Anglo-American system, firms tend to be shareholder-value oriented, being financed and disciplined at arm’s length by the capital market. Some other countries, and most prominently so Germany and Japan during the post-war period, traditionally give other stakeholders much more influence; and financing and controlling is done by banks and large industrial shareholders, often in a much more hands-on way and, some claim(ed), with a longer-run perspective than what is standard in a stockmarket-driven system. For example, Japan, long one of the world’s fastest growers and still the country with the second most valuable stock market, has a keiretsu system in which reciprocal holdings among business firms and between industrials and their main bank enable financing and disciplining within the group.1 There has been much division in the literature, both theoretical and empirical, as to how keiretsu membership affects corporate performance in general and the

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