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Equity Markets and Institutions: The Case of Japan

Corporate ownership and financing in Japan in the 20th century are striking. In the first half of the 20th century equity markets were active in raising more than 50% of the external financing of Japanese companies. Ownership was dispersed both by the standards of other developed economies at the time and even by those of the UK and U.S. today. In the second half of the 20th century, bank finance dominated external finance and interlocking shareholdings by banks and companies became widespread. The change from equity to bank finance and from an outsider system of public equity markets to an insider system in the middle of the 20th century coincided precisely with a marked increase in investor protection. Informal institutional arrangements rather than formal investor protection explain the existence of equity in the first half of the century - business co-ordinators in the early 20th century and zaibatsu later. Insider ownership in the form of bank ownership and cross-shareholdings emerged in the second half of the century as a response to the failure of minority shareholder protection, the needs of Japanese institutions to raise new equity for fast growing firms, and for the financial restructuring of failing firms.