Corporate financial behavior in the U.S. and Japan: the role of agency relationships

Abstract

This paper examines whether the apparent differences that exist in the opportunities for U.S. and Japanese financial institutions to be "active investors" in firms are reflected in observed differences in corporate dividend and leverage behavior. Agency-theoretic explanations of dividend behavior postulate the "internal" monitoring by shareholders and the "external" monitoring by the new issues markets as alternative methods of reducing the scope for managers to pursue goals other than profit maximization. The more concentrated are shareholdings the less need there is to enforce "external" monitoring via high dividend payout ratios. The role of Japanese financial institutions as controlling shareholders of firms in Japan may however mean that external monitoring performed by the new issues markets is not a viable alternative to the internal monitoring performed by financial institutions. Financial statements from a sample of Japanese and U.S. firms are examined to see if firms that have higher levels of ownership concentration do indeed exhibit lower dividend payout ratios. The evidence for U.S. firms is consistent with previous studies which have found such an inverse relationship. In contrast, no such relation is found for Japanese firms, consistent with the notion that dividend payments are not used as a device to lower agency costs in Japan.