Conflicts between parent company and non-controlling shareholders in stakeholder-oriented corporate governance: evidence from Japan
Abstract
When a company establishes subsidiaries with capital provided by a third party, the subsidiaries’ shareholders include the parent company (controlling shareholders) and minority (noncontrolling) shareholders. When shareholders’ interests are divergent, conflicts may arise, causing inefficiencies in the management of the subsidiaries or the corporate group. Such conflicts among shareholders are called principal–principal (PP) conflicts. However, adopting stakeholder-oriented corporate governance, a practice prevalent in Japan, may mitigate such PP conflicts. In fact, many Japanese companies report non-controlling interests in their consolidated financial statements. This paper investigates the influence of PP conflicts in Japanese corporate groups. The availability of nonconsolidated and consolidated financial statements in Japan allows for the comparison of parent companies’ data with those of the corporate group. The results reveal that (1) the larger the minority shareholders ratio (MER), the more the profits shifted to the parent company, and (2) the larger the MER, the higher the growth of the subsidiaries’ sales rates. These results suggest that while the parent company exploits the non-controlling shareholders through profit shifting, it also allocates sales growth opportunities to subsidiaries to mitigate PP conflicts.
Keyword : corporate governance, agency theory, principal–principal conflicts, profit shifting, sales growth, Japan
How to Cite
Fujita, K., & Yamada, A. (2022). Conflicts between parent company and non-controlling shareholders in stakeholder-oriented corporate governance: evidence from Japan. Journal of Business Economics and Management, 23(2), 263–283. https://doi.org/10.3846/jbem.2022.16060
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Cronqvist, H., & Nilsson, M. (2003). Agency costs of controlling minority shareholders. Journal of Financial and Quantitative Analysis, 38(4), 695–719. https://doi.org/10.2307/4126740
Desender, K. A., Aguilera, R. V., Lópezpuertas‐Lamy, M., & Crespi, R. (2016). A clash of governance logics: Foreign ownership and board monitoring. Strategic Management Journal, 37(2), 349–369. https://doi.org/10.1002/smj.2344
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Faccio, M., Lang, L. H. P., & Young, L. (2001). Dividends and expropriation. American Economic Review, 91(1), 54–78. https://doi.org/10.1257/aer.91.1.54
Ferris, S. P., Kim, K. A., & Kitsabunnarat, P. (2003). The costs (and benefits?) of diversified business groups: The case of Korean chaebols. Journal of Banking & Finance, 27(2), 251–273. https://doi.org/10.1016/S0378-4266(01)00248-5
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Gomes, A. (2000). Going public without governance: Managerial reputation effects. The Journal of Finance, 55(2), 615–646. https://doi.org/10.1111/0022-1082.00221
Griliches, Z. (1988). Productivity puzzles and R&D: Another nonexplanation. Journal of Economic Perspectives, 2(4), 9–21. https://doi.org/10.1257/jep.2.4.9
Hansmann, H., & Kraakman, R. (2001). The end of history for corporate law. Georgetown Law Journal, 89, 439–468.
He, J., Mao, X., Rui, O. M., & Zha, X. (2013). Business groups in China. Journal of Corporate Finance, 22, 166–192. https://doi.org/10.1016/j.jcorpfin.2013.05.001
Hines, J. R., & Rice, E. M. (1994). Fiscal paradise: Foreign tax havens and American business. The Quarterly Journal of Economics, 109(1), 149–182. https://doi.org/10.2307/2118431
Huyghebaert, N., & Wang, L. (2012). Expropriation of minority investors in Chinese listed firms: The role of internal and external corporate governance mechanisms. Corporate Governance: An International Review, 20(3), 308–332. https://doi.org/10.1111/j.1467-8683.2012.00909.x
Jebran, K., Chen, S., & Tauni, M. Z. (2019). Principal-principal conflicts and corporate cash holdings: Evidence from China. Research in International Business and Finance, 49, 55–70. https://doi.org/10.1016/j.ribaf.2019.02.010
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Jiang, F., Cai, W., & Zhu, B. (2018). Multiple large shareholders and corporate investment: Evidence from China. Journal of Corporate Finance, 50, 66–83. https://doi.org/10.1016/j.jcorpfin.2018.02.001
Jiang, G., Rao, P., & Yue, H. (2015). Tunneling through Non-Operational Fund Occupancy: An investigation based on officially identified activities. Journal of Corporate Finance, 32, 295–311. https://doi.org/10.1016/j.jcorpfin.2014.10.011
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Kester, W. C. (1991). Japanese takeovers: The global contest for corporate control. Harvard Business School Press.
Khanna, T., & Rivkin, J. W. (2001). Estimating the performance effects of business groups in emerging markets. Strategic Management Journal, 22(1), 45–74. 3.0.CO;2-F> https://doi.org/10.1002/1097-0266(200101)22:1<45::AID-SMJ147>3.0.CO;2-F
La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The Journal of Finance, 54(2), 471–517. https://doi.org/10.1111/0022-1082.00115
Lewellyn, K., & Judge, W. (2012). Corporate governance and initial public offerings in the United States. In A. Zattoni, & W. Judge (Eds.), Corporate governance and initial public offerings: An international perspective (pp. 520–547). Cambridge University Press. https://doi.org/10.1017/CBO9781139061513.011
Lincoln, J. R., & Gerlach, M. L. (2004). Japan’s network economy: Structure, persistence, and change. Cambridge University Press. https://doi.org/10.1017/CBO9780511584442
Lincoln, J. R., Gerlach, M. L., & Takahashi, P. (1992). Keiretsu networks in the Japanese economy: A dyad analysis of intercorporate ties. American Sociological Review, 57(5), 561–585. https://doi.org/10.2307/2095913
Lins, K. V. (2003). Equity ownership and firm value in emerging markets. Journal of Financial and Quantitative Analysis, 38(1), 159–184. https://doi.org/10.2307/4126768
Morck, R., Wolfenzon, D., & Yeung, B. (2005). Corporate governance, economic entrenchment, and growth. Journal of Economic Literature, 43(3), 655–720. https://doi.org/10.1257/002205105774431252
Opoku-Mensah, E., & Yin, Y. (2021). Controlling shareholders’ influence on acquisition decisions and value creation: An empirical study from China. International Journal of Finance and Economics, 1–16. https://doi.org/10.1002/ijfe.2520
Pan, Y. (1997). The formation of Japanese and U.S. equity joint ventures in China. Strategic Management Journal, 18(3), 247–254. 3.0.CO;2-O> https://doi.org/10.1002/(SICI)1097-0266(199703)18:3<247::AID-SMJ873>3.0.CO;2-O
Pan, Y., & Li, X. (2000). Joint venture formation of very large multinational firms. Journal of International Business Studies, 31(1), 179–189. https://doi.org/10.1057/palgrave.jibs.8490896
Sakawa, H., & Watanabel, N. (2012). Corporate governance and initial public offerings in Japan. In A. Zattoni & W. Judge (Eds.), Corporate governance and initial public offerings: An international perspective (pp. 238–261). Cambridge University Press. https://doi.org/10.1017/CBO9781139061513.011
Sakawa, H., & Watanabel, N. (2018). Parent control and ownership monitoring in publicly listed subsidiaries in Japan. Research in International Business and Finance, 45, 7–14. https://doi.org/10.1016/j.ribaf.2017.07.127
Sakawa, H., & Watanabel, N. (2020). Institutional ownership and firm performance under stakeholder-oriented corporate governance. Sustainability, 12(3), 1021. https://doi.org/10.3390/su12031021
Sakawa, H., & Watanabel, N. (2021). Family control and corporate innovation in stakeholder-oriented corporate governance. Sustainability, 13(9), 5044. https://doi.org/10.3390/su13095044
Sauerwald, S., Heugens, P. P. M. A. R., Turturea, R., & Essen, M. van. (2019). Are all private benefits of control ineffective? Principal–principal benefits, external governance quality, and firm performance. Journal of Management Studies, 56(4), 725–757. https://doi.org/10.1111/joms.12420
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
Yoshimori, M. (1995). Whose company is it? The concept of the corporation in Japan and the west. Long Range Planning, 28(4), 2–44. https://doi.org/10.1016/0024-6301(95)00025-E
Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal-principal perspective. Journal of Management Studies, 45(1), 196–220. https://doi.org/10.1111/j.1467-6486.2007.00752.x
Accounting Standards Board of Japan. (2013). ASBJ Statement No. 22 accounting standard for consolidated financial statements. https://www.asb.or.jp/jp/wp-content/uploads/20200331_06.pdf
Aguilera, R. V., & Jackson, G. (2003). The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management Review, 28(3), 447–465. https://doi.org/10.5465/amr.2003.10196772
Almeida, H. V., & Wolfenzon, D. (2006). A theory of pyramidal ownership and family business groups. The Journal of Finance, 61(6), 2637–2680. https://doi.org/10.1111/j.1540-6261.2006.01001.x
Aoki, M. (1990). Toward an economic model of the Japanese firm. Journal of Economic Literature, 28(1), 1–27.
Bae, K.-H., Kang, J.-K., & Kim, J.-M. (2002). Tunneling or value added? Evidence from mergers by Korean business groups. The Journal of Finance, 57(6), 2695–2740. https://doi.org/10.1111/1540-6261.00510
Bank of Japan. (1996–2012). Honpo Taigai Shisan Fusai Zandaka, Shoken Toshi Tou (Fusai) Zandaka Chiikibetsu Tokei [Japan’s outstanding overseas assets and liabilities: Statistics on outstanding equity securities (liabilities) by region]. https://www.boj.or.jp/statistics/br/bop/index.htm/
Bauer, A. M., Fang, J., Pittman, J., Zhang, Y., & Zhao, Y. (2020). How aggressive tax planning facilitates the diversion of corporate resources: Evidence from path analysis. Contemporary Accounting Research, 37(3), 1882–1913. https://doi.org/10.1111/1911-3846.12563
Bertrand, M., Mehta, P., & Mullainathan, S. (2002). Ferreting out tunneling: An application to Indian business groups. The Quarterly Journal of Economics, 117(1), 121–148. https://doi.org/10.1162/003355302753399463
Blinder, A. (2000, December 5). More like them? The American Prospect. https://prospect.org/world/like-them/
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Chang, S. J., & Hong, J. (2000). Economic performance of group-affiliated companies in Korea: Intragroup resource sharing and internal business transactions. The Academy of Management Journal, 43(3), 429–448. https://doi.org/10.5465/1556403
Charkham, J. P., & Ploix, H. (2005). Keeping better company: Corporate governance ten years on. Oxford University Press. https://doi.org/10.1093/acprof:oso/9780199243198.001.0001
Claessens, S., Djankov, S., & Lang, L. H. P. (2000). The separation of ownership and control in East Asian Corporations. Journal of Financial Economics, 58(1), 81–112. https://doi.org/10.1016/S0304-405X(00)00067-2
Clark, R. (1979). The Japanese company. Yale University Press.
Colpan, A. M., Yoshikawa, T., Hikino, T., & Brio, E. B. D. (2011). Shareholder heterogeneity and conflicting goals: Strategic investments in the Japanese electronics industry. Journal of Management Studies, 48(3), 591–618. https://doi.org/10.1111/j.1467-6486.2010.00958.x
Cronqvist, H., & Nilsson, M. (2003). Agency costs of controlling minority shareholders. Journal of Financial and Quantitative Analysis, 38(4), 695–719. https://doi.org/10.2307/4126740
Desender, K. A., Aguilera, R. V., Lópezpuertas‐Lamy, M., & Crespi, R. (2016). A clash of governance logics: Foreign ownership and board monitoring. Strategic Management Journal, 37(2), 349–369. https://doi.org/10.1002/smj.2344
Dharwadkar, B., George, G., & Brandes, P. (2000). Privatization in emerging economies: An agency theory perspective. Academy of Management Review, 25(3), 650–669. https://doi.org/10.2307/259316
Faccio, M., Lang, L. H. P., & Young, L. (2001). Dividends and expropriation. American Economic Review, 91(1), 54–78. https://doi.org/10.1257/aer.91.1.54
Ferris, S. P., Kim, K. A., & Kitsabunnarat, P. (2003). The costs (and benefits?) of diversified business groups: The case of Korean chaebols. Journal of Banking & Finance, 27(2), 251–273. https://doi.org/10.1016/S0378-4266(01)00248-5
Financial Times. (2007a). TSE plans crackdown on groups that abuse minority investor rights: [Asia edition]. https://search.proquest.com/docview/250031117
Financial Times. (2007b). Subsidiaries in Japan THE LEX: [London 2nd edition]. https://search.proquest.com/docview/250044187
Gomes, A. (2000). Going public without governance: Managerial reputation effects. The Journal of Finance, 55(2), 615–646. https://doi.org/10.1111/0022-1082.00221
Griliches, Z. (1988). Productivity puzzles and R&D: Another nonexplanation. Journal of Economic Perspectives, 2(4), 9–21. https://doi.org/10.1257/jep.2.4.9
Hansmann, H., & Kraakman, R. (2001). The end of history for corporate law. Georgetown Law Journal, 89, 439–468.
He, J., Mao, X., Rui, O. M., & Zha, X. (2013). Business groups in China. Journal of Corporate Finance, 22, 166–192. https://doi.org/10.1016/j.jcorpfin.2013.05.001
Hines, J. R., & Rice, E. M. (1994). Fiscal paradise: Foreign tax havens and American business. The Quarterly Journal of Economics, 109(1), 149–182. https://doi.org/10.2307/2118431
Huyghebaert, N., & Wang, L. (2012). Expropriation of minority investors in Chinese listed firms: The role of internal and external corporate governance mechanisms. Corporate Governance: An International Review, 20(3), 308–332. https://doi.org/10.1111/j.1467-8683.2012.00909.x
Jebran, K., Chen, S., & Tauni, M. Z. (2019). Principal-principal conflicts and corporate cash holdings: Evidence from China. Research in International Business and Finance, 49, 55–70. https://doi.org/10.1016/j.ribaf.2019.02.010
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Jiang, F., Cai, W., & Zhu, B. (2018). Multiple large shareholders and corporate investment: Evidence from China. Journal of Corporate Finance, 50, 66–83. https://doi.org/10.1016/j.jcorpfin.2018.02.001
Jiang, G., Rao, P., & Yue, H. (2015). Tunneling through Non-Operational Fund Occupancy: An investigation based on officially identified activities. Journal of Corporate Finance, 32, 295–311. https://doi.org/10.1016/j.jcorpfin.2014.10.011
Judge, W., & Zattoni, A. (2012). Introduction. In A. Zattoni & W. Judge (Eds.), Corporate governance and initial public offerings: An international perspective (pp. 1–36). Cambridge University Press. https://doi.org/10.1017/CBO9781139061513.011
Kester, W. C. (1991). Japanese takeovers: The global contest for corporate control. Harvard Business School Press.
Khanna, T., & Rivkin, J. W. (2001). Estimating the performance effects of business groups in emerging markets. Strategic Management Journal, 22(1), 45–74. 3.0.CO;2-F> https://doi.org/10.1002/1097-0266(200101)22:1<45::AID-SMJ147>3.0.CO;2-F
La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The Journal of Finance, 54(2), 471–517. https://doi.org/10.1111/0022-1082.00115
Lewellyn, K., & Judge, W. (2012). Corporate governance and initial public offerings in the United States. In A. Zattoni, & W. Judge (Eds.), Corporate governance and initial public offerings: An international perspective (pp. 520–547). Cambridge University Press. https://doi.org/10.1017/CBO9781139061513.011
Lincoln, J. R., & Gerlach, M. L. (2004). Japan’s network economy: Structure, persistence, and change. Cambridge University Press. https://doi.org/10.1017/CBO9780511584442
Lincoln, J. R., Gerlach, M. L., & Takahashi, P. (1992). Keiretsu networks in the Japanese economy: A dyad analysis of intercorporate ties. American Sociological Review, 57(5), 561–585. https://doi.org/10.2307/2095913
Lins, K. V. (2003). Equity ownership and firm value in emerging markets. Journal of Financial and Quantitative Analysis, 38(1), 159–184. https://doi.org/10.2307/4126768
Morck, R., Wolfenzon, D., & Yeung, B. (2005). Corporate governance, economic entrenchment, and growth. Journal of Economic Literature, 43(3), 655–720. https://doi.org/10.1257/002205105774431252
Opoku-Mensah, E., & Yin, Y. (2021). Controlling shareholders’ influence on acquisition decisions and value creation: An empirical study from China. International Journal of Finance and Economics, 1–16. https://doi.org/10.1002/ijfe.2520
Pan, Y. (1997). The formation of Japanese and U.S. equity joint ventures in China. Strategic Management Journal, 18(3), 247–254. 3.0.CO;2-O> https://doi.org/10.1002/(SICI)1097-0266(199703)18:3<247::AID-SMJ873>3.0.CO;2-O
Pan, Y., & Li, X. (2000). Joint venture formation of very large multinational firms. Journal of International Business Studies, 31(1), 179–189. https://doi.org/10.1057/palgrave.jibs.8490896
Sakawa, H., & Watanabel, N. (2012). Corporate governance and initial public offerings in Japan. In A. Zattoni & W. Judge (Eds.), Corporate governance and initial public offerings: An international perspective (pp. 238–261). Cambridge University Press. https://doi.org/10.1017/CBO9781139061513.011
Sakawa, H., & Watanabel, N. (2018). Parent control and ownership monitoring in publicly listed subsidiaries in Japan. Research in International Business and Finance, 45, 7–14. https://doi.org/10.1016/j.ribaf.2017.07.127
Sakawa, H., & Watanabel, N. (2020). Institutional ownership and firm performance under stakeholder-oriented corporate governance. Sustainability, 12(3), 1021. https://doi.org/10.3390/su12031021
Sakawa, H., & Watanabel, N. (2021). Family control and corporate innovation in stakeholder-oriented corporate governance. Sustainability, 13(9), 5044. https://doi.org/10.3390/su13095044
Sauerwald, S., Heugens, P. P. M. A. R., Turturea, R., & Essen, M. van. (2019). Are all private benefits of control ineffective? Principal–principal benefits, external governance quality, and firm performance. Journal of Management Studies, 56(4), 725–757. https://doi.org/10.1111/joms.12420
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
Yoshimori, M. (1995). Whose company is it? The concept of the corporation in Japan and the west. Long Range Planning, 28(4), 2–44. https://doi.org/10.1016/0024-6301(95)00025-E
Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal-principal perspective. Journal of Management Studies, 45(1), 196–220. https://doi.org/10.1111/j.1467-6486.2007.00752.x