Do Large Shareholders Monitor or Collude with Banks in Japan?

The authors argue that the deficiency of effective corporate governance of banks has caused inefficient management of banks in Japan for at least the past two decades. The focus is the role of the largest shareholders. Using a detailed ownership database covering the period 1980-2000, the authors find that banks and insurers have dominated the top five largest shareholders. Even though banks and insurers are endowed with substantial power to vote against management, they are less likely to be effective monitors for two reasons:

• they have business relations with the banks they hold shares
• they themselves appear to have weak corporate governance.

Their empirical results show that ownership of a bank by other banks or insurance companies is associated with higher growth of total loans and real estate loans, and negatively related to the bank's performance. The authors conclude that banks and insurance companies collude with bank management.

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