اثر برگزاری سهام توسط بانک های اصلی بر کیفیت سود شرکت های مشتری Does equity holding by main banks affect the earnings quality of client firms? Empirical evidence from Japan

1. Introduction Unlike banks in the US, Japan relied on a particular set of relationship embedded in regulators, banks and corporate firms in its catching-up period to promote industrial finance and to mitigate investment inefficiencies caused by market imperfections, what came to be known as “Japan Incorporated” or a “Convoy System” (Wu and Yao, 2012; Suzuki et al., 2011; Prowse, 1990). One of the unique features of this convoy style financing was the “main bank system” where the main bank was allowed to perform the role of a quasi-insider monitor of the client firms by giving them both loans and equity (Sheard, 1989; Aoki, 1990; Aoki et al., 1994; Ueda, 1994; Kawai et al., 1996; Hoshi and Kashyap, 2001). The main bank, as a creditor and shareholder, had strong incentives to monitor financial transactions of the borrowing firms and their investment opportunities to ensure that managers make optimal decisions (Suzuki, 2011; Douthett Jr. and Jung, 2001, Hoshi et al., 1991). Besides, the main bank maintained a close relationship with clients, sometimes taking a seat on the board of the client firms, to mitigate information asymmetry and moral hazards in intermediating long-term finance (Diamond, 1984; Hoshi et al., 1990; Sheard, 1994). Other private financial institutions and non-main banks relied on the monitoring function of the main banks to reduce transaction cost (Kawai et al., 1996). Simultaneously, the Ministry of Finance (MOF) ensured credibility in financial transactions by adopting different sanctions against the main bank when it was judged to be poorly managed and needed radical organization and asset restructuring (Suzuki, 2011). As a whole, the main bank system was hailed as a catalyst for the industrial development in Japan during its “Heydey” period until around the mid-1970s. However, after the burst of the bubble in the year 1990, the main bank system received severe criticism from many scholars and academics in that the main banks failed to assess risks of the borrowing firms when they exposed to greater uncertainties with their traditional relationship mode of finance and promulgated inefficiency of many sick firms by injecting additional loans and equity instead of bailing out them (Allen, 1996; Weinstein and Yafeh, 1998; Yamori and Murakami, 1999; Kang and Stulz, 2000; Hoshi and Kashyap, 2001; Wu and Xu, 2005). Consequently, Japan accepted the US style of bank monitoring and governance by undertaking a “big bang economic and accounting reform” program in the year 1997. Indeed, the overall impact of the reform program helped increase funding cost of the banks, reduced significantly equity holdings of the main banks, and lured foreigners to hold substantial equity stakes.