UNDERSTANDING THE JAPANESE KEIRETSU - OVERLAPS BETWEEN CORPORATE GOVERNANCE AND INDUSTRIAL-ORGANIZATION

Study of the Japanese keiretsu, a system of interlocking banks and industrial companies, has largely focused on the monitoring function performed by main banks. This function is said to alleviate in Japan the agency costs associated with American separation of ownership and control. Professors Gilson and Roe argue that key features of the Japanese cross-ownership system must also be understood as ''contractual governance,'' aimed at facilitating relational investments, of which investment in financial capital is only one. Japanese cross-ownership is better understood as playing a role in industrial organization as well as corporate governance, For example, cross-ownership (1) lowers the costs of information transfer by allowing other parties to acquire information as suppliers as well as stockholders, (2) increases the incentives to intervene when a firm is in trouble, in order to save a stock investment and to assist a supplier, and (3) provides added means of intervention since stockholders are both buyers of a product and owners of stock, and thus can exercise voice as well as exit.