Global COE Hi-Stat Discussion Paper Series 031

Research Unit for Statisticaland Empirical Analysis in Social Sciences (Hi-Stat)Managerial Compensation, Corporate Governance, andBusiness Performance in Japan:
Evidence Using New Micro Data

Hi-Stat Discussion Paper

Hideaki Sakawa
Naoki Watanabel

February 2009

Hi-Stat
Institute of Economic Research
Hitotsubashi University
2-1 Naka, Kunitatchi Tokyo, 186-8601 Japan
http://gcoe.ier.hit-u.ac.jp

Managerial compensation, corporate governance, and businessperformance in Japan: Evidence using new micro data

Hideaki Sakawa a∗ , Naoki Watanabel baInstitute of Social and Economic Research, Osaka University, Ibaraki,
Osaka, 567-0047, Japanb∗

Osaka School of International Public Policy, Osaka University,
Toyonaka, Osaka, 560-0043, Japan

Correspondence author.Hideaki Sakawa is a COE visiting young scholar for the Global COE program “Research
Unit for Statistical and Empirical Analysis in Social Sciences” at Hitotsubashi University. Tel: +81-6-6879-9161
E-mail address: sakawa@iser.osaka-u.ac.jp.

Abstract
This paper examines the relations between the disciplinary role of Japanese relationship-oriented
corporate governance mechanisms, such as keiretsu memberships and bank-appointed directors, andpay–performance sensitivity in Japan. Previous studies show that pay–performance sensitivity is
positive and almost the same as in a market-oriented system like that of the USA. However, under
the Japanese relationship-oriented system, pay–performance sensitivity may be controlled byfinancial keiretsu ties and bank-appointed directors. We find that the disciplinary mechanism ofkeiretsu memberships and bank-appointed monitors did not function well in Japan in the 1990s.

JEL Classification: G30; G32; J33; L22

Keywords: Corporate Governance; Firm Performance; Japan; Keiretsu Memberships;
Managerial Compensation

1. Introduction
Japanese corporate governance mechanisms are relationship oriented systems and are different fromthe US market-oriented systems. In the 1990s, there were no Japanese firms with compensationcommittees that included ‘outside’ directors to monitor executives and provide incentives, unlike in the
United States. Aoki (1990) indicates that some kind of discipline may be imposed by the main banks
during financial distress. Furthermore, financial keiretsu ties are organized around the main bank and thedisciplinary roles of banks are expected to be stronger in firms having financial keiretsu ties. Therefore,bank-appointed monitors and financial keiretsu ties are expected to be features of Japanese disciplinary
mechanisms.
These differences in governance mechanisms between the US and Japan might affect the incentive
mechanisms for executives. However, there remains an empirical question as to whether bank-appointed
monitors and keiretsu memberships help to provide the executives with desirable incentive compensation
packages.
The purpose of this paper is to examine the relations between the role of bank-appointed monitors andfinancial keiretsu memberships, and pay–performance sensitivity. We implicitly assume that banks andfinancial keiretsu members can better observe the behavior of executives, and the information gained isused to determine the structure of compensation and incentives for executives. Previous studies show
positive relations between changes in managerial compensation and firm performance in the 1980s and1990s in Japan. In the Japanese relationship oriented system, there is an important perception about theeffect of bank-appointed monitors and keiretsu memberships on pay–performance relations.
Our findings in this paper are summarized as the following two main points. The first finding is that
there is no significant relation between pay–performance sensitivity and firms with and without financial
keiretsu ties from 1992 to 1995, which is consistent with previous studies. Second, pay–performancesensitivities for stock returns and sales growth decrease in firms with bank-appointed directors. We

3

conclude that the disciplinary mechanism of the Japanese relationship-oriented system such as financial
keiretsu memberships and bank-appointed directors did not function well in Japan during the 1990s.

2. The determination of managerial compensation in Japan
Holmstrom (1979) and Jensen and Meckling (1976) predict pay–performance relations based on
agency theory. Their approach is based on a misalignment between the interests of stockholders andmanagers in the public firm. If conflicts between stockholders and managers are not resolved, thestockholders design compensation packages for managers to minimize the conflicts. These agency models
suggest that different corporate governance mechanisms may result in differences in compensation
packages. We empirically analyze managerial compensation under the Japanese relationship-oriented
system.
There are some basic differences between the US and Japanese systems in who sets managerial
compensation and how it is set. In large US corporations, the compensation level of directors is approvedby the firm’s compensation committee including two or more ‘outside’ directors. Murphy (1999)
indicates that such compensation committees are expected to be independent of the CEO to some extent
and function as a kind of effective corporate governance mechanism. In Japan, however, there were nocompensation committees before the amendment of commercial law in 2002. Directors provide initialrecommendations for their own compensation levels, which are approved by the annual general meetingof stockholders. As a result, the sensitivity of managerial compensation to firm performance is weaker inJapan.
In the USA, from this agency view, the board of directors looks after shareholders’ interests andprovides desirable incentives for managers. Previous empirical studies in the USA such as Mehran (1995),
Bertrand and Mullainathan (2000), and Hartzell and Starks (2003) show that the board’s monitoring

4

intensity and the pay–performance sensitivity of the CEO’s compensation are increase with the board’s
independence from the CEO. 1
The Japanese corporate governance system is relationship-oriented (Aoki, 1990; Milgrom and Roberts,
1992). In a relationship-oriented system, banks and business groups such as financial keiretsu would
effectively function as a corporate governance mechanism. In previous Japanese studies, Kaplan and
Minton (1994) and Morck and Nakamura (1999) find that banks are more likely to appoint theiremployees as directors when a company is in financial distress and investigate whether main banks
monitor and control the firms with financial keiretsu ties. Kato (1997) and Basu et al. (2007) find thatcompensation for CEOs of firms with financial keiretsu ties is lower.
Bank-appointed directors on company boards may be expected to provide desirable incentives for
executives in Japan. 2 Abe et al. (2005) point out that the bank-appointed directors can affect thedetermination of executive salaries and bonuses because they have access to information on the firm’s
decision making because they attend the firm’s board meetings.

3. Data and empirical strategies
3.1 Data
We choose the sample period 1992–1995 because we can only compare the same managerial
compensation package for all manufacturing firms as cash compensation. 3 Stock options were unavailable

1

Ozerturk (2005) constructs a theoretical model to explain these empirical findings.

2

Essentially, the main bank is the largest lender and it gathers vital information on its lender firms and sends theiremployees to the borrower’s board.
3

Many previous studies such as Joh (1999) focus on manufacturing firms. This paper also analyzes how

manufacturing firms control for some of the industry-specific effects on pay–performance relations. In particular,5until they were legalized in 1997 and so all executives were paid cash compensation and bonuses during
this period.
The sample consists of 2088 observations from 1992 to 1995 for 522 Japanese manufacturing firms
publicly trading on the first section of the Tokyo Stock Exchange. The firms were subdivided into 15
manufacturing industry groups. The financial data were obtained from the Nikkei NEEDS database. The
Nikkei NEEDS data were sourced from annual company reports that contain a panel of cash
compensation data in the financial statements. Data on characters and number of board members weremanually collected from Yakuin Shiki Ho (1992–1996). The financial keiretsu ties data are collected from
Kigyo Keiretsu Souran (1991). We construct the financial keiretsu dummy which indicates whether or noteach firm belongs to an executive gathering known as Shacnokai (presidents’ club) 4 following Hoshi and
Kashyap (2001).
Data on compensation for Japanese CEOs are not publicly available, and are only available for totalsalaries and bonuses earned by all directors. Prior studies by Kaplan (1994), Ang and Constand (1997),
and Joh (1999) calculate the average director’s compensation by dividing total salaries and bonuses of allnonmanufacturing industries such as construction suffer from ‘bad loan’ problems. Therefore, we exclude thenonmanufacturing industry.
4

Japanese financial keiretsu consists of six major financial groups: Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa, andDaiichi-Kangyo.

6directors by the number of directors. 5 We also use the average director’s compensation as a measure ofmanagerial compensation. 6

3.2 Descriptive statistics
We provide the definitions of the variables (ΔCashComp, ΔROA, RET, GSALE, LOSS, K, and B) in
Table 1 and their descriptive statistics in Table 2. Table 2 shows that the change ratio of managerial cash
compensation (ΔCashComp) was –0.17% from 1992 to 1995.

INSERT TABLE 1 and 2 HERE

We employ four firm performance variables: the first difference in ROA (ΔROA), stock returns (RET),
the growth rate of sales (GSALE), and a loss/profit dummy variable (LOSS). The average of ΔROA was–0.187%, and that of lagged ΔROA was –0.493%. The average of RET was approximately –6.29%, andthat of lagged RET was –9.135%. This means that firm accounting performance was slightly negative, butmarket performance was highly negative. The average of the growth rate was –1.66%, and that of the loss5

Joh (1999) points out that the incentive compensation of directors on the board as a group is more adequate thanthat of the top manager alone because the board members make decisions regarding the firm’s product market
strategy as a group. Regarding this point, Kubo and Saito (2008) try to estimate a proxy for top manager
compensation. Kato and Rockel (1992), Kato (1997), and Kato and Kubo (2006) adopt CEOs’ individualcompensation data of Japanese largest firms.
6

Some kind of less visible compensation such as perquisites cannot be included in this average compensation. Katoand Long (2006), for example, calculate executive compensation including perquisites in China. In this paper, wecannot use such compensation data; however, the time-invariant heterogeneity of compensation such as perquisites
are controlled by using first differences of the estimation.

7

dummy was 16.2%. The average of the financial keiretsu dummy (K) was 11.3%. The average of thebank-appointed monitor ratio (B) was 38.7% and is smaller than that of the 55 electronics firms used in
Abe et al. (2005).
Furthermore, the descriptive statistics classified by K and B are shown in Table 3. In panel A, thechange ratio of Managerial compensation and all firm performance variables are insignificant. In panel B,
the change ratio of Managerial compensation and firm performance variables (ΔROA, RET, and GSALE)
are insignificant. The ratio of LOSS firms with bank-appointed directors was 18.5% and was higher thanthat without bank-appointed directors. This result is consistent with those of Kaplan (1994) and Kaplan
and Minton (1994).

INSERT TABLE 3 HERE

3.3 Empirical strategies
We estimate two equations to check the pay–performance relations and the difference in these
relations between firms with and without financial keiretsu ties and with and without bank-appointed
directors. The performance variables are chosen following the previous Japanese studies of Kaplan (1994),
Kato and Kubo (2006), and Mitsudome et al. (2008). 7 We predict that Japanese managerial
compensation is positively affected by a change in the performance measures ΔROA and GSALE, andnegatively by a change in LOSS following the previous results.
To provide statistical evidence for the differences in pay–performance sensitivities between firms withand without financial keiretsu ties, we estimate equation (1) below for firms with and without them.

7

Kaplan (1994), Kaplan and Minton (1994), and Kang and Shivdasani (1995) show that CEO turnover in Japanese

capital markets is closely related to poor stock performance, as it is in the US market.

8

Previous studies cannot uniquely predict whether or not keiretsu memberships affect the determination of
the pay–performance relations.

ΔCashCompi ,t = γ 1, t ΔROA it + γ 2, t RETit + γ 3, t GSALE it + γ 4, t LOSS it + γ 5, t ΔROA it * K it
+ γ 6, t RETit * K it + γ 7, t ΔGSALEit * K it + γ 8, t ΔLOSS it * K it + γ 9, t K it + d t + ε it(1)

There are two predictions about the discipline of financial keiretsu ties in Japan. Some scholars pointout that the discipline of executives is characterized by their keiretsu relationships. 8 Berglof and Perotti(1994) argue that the financial keiretsu system plays a role in effectively monitoring and controlling
managers. Therefore, managerial compensation should be lower for firms with financial keiretsu ties. On
the other hand, Gurati and Singh (1998) argue that coordination costs among keiretsu memberships
reduce profits of firms with financial keiretsu ties. In addition, Miwa and Ramseyer (2002) point out that
financial keiretsu takes only a ceremonial role. These studies imply that the financial keiretsu system
might be an ineffective discipline mechanism.
We cannot initially determine whether or not the disciplinary mechanisms of firms with keiretsu
membership are effective. We construct two hypotheses about their disciplinary roles. The null hypothesisis that financial keiretsu memberships take important roles in monitoring the executives of firms andhelping to enhance the incentive of executives. Some scholars, such as Berglof and Perotti (1994), argue
that the financial keiretsu system takes a role in the effective monitoring and controlling of managers andcompensation should be lower for firms with financial keiretsu ties. Kato (1997) and Basu et al. (2007)
show that top managerial compensation is lower for firms with financial keiretsu ties. In other words,

8

Sheard (1989) and Aoki (1990) argue that Japanese main bank relationships play an important role in corporate

governance and discipline managers for poor performance. Aoki (1990) further argues that the main bank monitors
its keiretsu firms in the roles of major stockholders and principal lenders.

9financial keiretsu ties are expected to be important corporate governance mechanisms for monitoring theexecutives of firms and helping to enhance the incentives of executives.
We alternatively hypothesize that the main bank does not monitor the executives of firms withfinancial keiretsu ties effectively and does not enhance but rather decreases the incentives of executives
with them. Hoshi and Kashyap (2004) suggest that the Japanese economy began to underperform in 1992
and McGuire and Dow (2008) point out that this under-performing economy during 1990s may haveaffected the roles of the financial keiretsu. Hoshi (2006) concludes that Japanese resource allocations are
inefficient because of support for weaker keiretsu member firms, which they call “Zombie” firms. These
results suggest that pay–performance relations might be weaker in the 1990s in firms with financial
keiretsu ties.
We propose a hypothesis about the cross terms of the keiretsu dummy and four performance variables:
ΔROA*K, RET*K, GSALE*K, and LOSS*K. In the null hypothesis (Hypothesis 1N), we predict that thecontribution of keiretsu memberships is to strengthen pay–performance sensitivity. On the other hand, thepay–performance relations in firms with financial keiretsu ties are predicted to be weakened in thealternative hypothesis (Hypothesis 1A).

Hypothesis 1
The null hypothesis (Hypothesis 1N) is that γ 5 , γ 6 , and γ 7 will be positive or zero, and γ 8 will be
zero or negative. The alternative hypothesis (Hypothesis 1A) is that γ 5 , γ 6 , and γ 7 will be significantly
negative, and γ 8 will be significantly positive.

H 1 N : γ 5, t , γ 6, t , γ 7, t ≥ 0, γ 8, t ≤ 0 vs H 1 A : γ 5, t , γ 6, t , γ 7, t < 0, γ 8, t > 0 .

10To analyze the differences of the pay–performance relations between firms with and without bankappointed directors, we estimate the following equation (2) including the cross term of performancemeasures and the bank director’s dummy variable (B).

ΔCashCompi ,t = γ 1, t ΔROA it + γ 2, t RETit + γ 3, t GSALE it + γ 4, t LOSS it + γ 5, t ΔROA it * B it
+ γ 6, t RETit * B it + γ 7, t ΔGSALEit * B it + γ 8, t ΔLOSS it * B it + γ 9, t B it + d t + ε it(2)

There are two predictions about the disciplines of bank relationships in Japan. Some scholars point out
that the discipline of executives is characterized by their bank relationships. 9 We cannot initiallydetermine whether or not the discipline of bank-appointed directors is effective.
The null hypothesis is that bank-appointed directors monitor the executives of firms and help toenhance the incentive of executives. Some scholars, such as Grundfest (1990), argue that bankrelationships reduce the agency cost and allow investors to monitor managers more effectively than in theUSA. Kaplan (1994) shows that the likelihood of new bank-appointed directors is closely positive withnegative profit. Kaplan and Minton (1994) and Morck and Nakamura (1999) find that banks are more
likely to appoint one of their employees as a director when a company is in financial distress. 10 Kaplan
and Minton (1994) show that bank-appointed directors take an important discipline role, which affects top
executive turnover in the case of poor performance. In other words, bank-appointed directors are expected
to monitor the executives of firms and to help enhance the incentive of executives.
We alternatively hypothesize that bank-appointed directors do not monitor the executives of firms
effectively and do not help to enhance, but rather decrease, the incentives of executives. Aoki (1990)
points out that Japanese executives earn profit to satisfy the interests of debt-holders. Weinstein and
Yafeh (1998) show that bank-appointed directors consider the repayment of bank loans and do not think

9

Aoki (1990) and Sheard (1989) argue that Japanese main bank relationships play an important role in corporate

governance and discipline managers’ poor performance.
10

Hoshi and Kashyap (2001) discuss the role of bank-appointed directors in detail.

11

of maximizing firm value. Abe et al. (2005) show that the bonus ratio of firms with bank-appointed
directors decreases firm performance in Japanese electronics firms. 11 These results suggest that pay–
performance relations are weaker in firms with bank-appointed directors.
We also propose a hypothesis about the cross terms of the bank-appointed directors’ dummy and thefour performance variables: ΔROA*B, RET*B, GSALE*B, and LOSS*B. In the null hypothesis(Hypothesis 2N), we predict that bank-appointed directors help to strengthen pay–performance sensitivity.
On the other hand, the pay–performance relations in firms with bank-appointed directors are predicted to
be weaker in the alternative hypothesis (Hypothesis 2A).

Hypothesis 2
The null hypothesis (Hypothesis 2N) is that γ 5 , γ 6 , and γ 7 will be positive or zero, and γ 8 will be
zero or negative. The alternative hypothesis (Hypothesis 2A) is that γ 5 , γ 6 , and γ 7 will be significantly
negative, and γ 8 will be significantly positive.

H 1 N : γ 5, t , γ 6, t , γ 7, t ≥ 0, γ 8, t ≤ 0 vs H 1 A : γ 5, t , γ 6, t , γ 7, t < 0, γ 8, t > 0 .

4. Results
Table 4 shows the estimated results of equations (1) from 1992 to 1995. In the second column, weshow the results of the relations between changes in managerial compensation and each individual
performance measure and cross terms of the performance measures and financial keiretsu ties (K). In thethird column, we show the estimated results of equation (1).

11

Abe et al. (2005) find that the bonus ratio of firms with bank-affiliated directors is lower.

12

INSERT TABLE 4 HEREIn the second column, all of the performance measures are statistically significant at the 1% level, andtheir coefficients are 1.163, 0.223, 25.770, and –9.176. These results show the positive pay–performance
relations. On the other hand, the cross terms of keiretsu memberships and each of performance measures(ΔROA*K, RET*K, GSALE*K, and LOSS*K) are insignificant. This indicates that financial keiretsu
memberships do not affect pay–performance sensitivities.
In the third column, the estimated result of equation (1) is reported. We find that the relations betweenchanges in managerial compensation and ΔROA, RET, and GSALE are significantly positive, and LOSS
is significantly negative. The coefficients of all the performance measures show positive pay–
performance relations, as does the individual performance measure. The cross terms of keiretsu
memberships and performance measures (ΔROA*K, RET*K, GSALE*K, and LOSS*K) are also
insignificant as they were in the second column. We also find no significant relation between change inmanagerial compensation and financial keiretsu ties (K).
In the third column, the F-statistic for the cross terms of keiretsu memberships and performancemeasures (ΔROA*K, RET*K, GSALE*K, and LOSS*K) is 1.78 and insignificant at the 10% level. This
indicates that there is no significant difference in sensitivities between firms with and without financial
keiretsu ties. We also find that there are no significant relations between changes in managerial
compensation and these cross terms. This result is consistent with Hypothesis 1N. This implies that thepay–performance sensitivity of firms with financial keiretsu ties is almost the same as firms without them.

INSERT TABLE 5 HERE

13

Table 5 shows the estimated results of equation (2). In the second and third columns, we show the
relations between changes in managerial compensation and each of the performance measures and thecross terms of the performance measures and the bank-appointed dummy variable (B).
In the second column, we find that changes in managerial compensation are significantly positive for
ΔROA, RET, and GSALE and negative for LOSS. All of the estimates are statistically significant at the
1% level, and their coefficients are 1.056, 0.260, 34.531, and –9.548. These results show positive pay–
performance relations. Only the cross term of stock returns and the bank-appointed dummy (RET*B) is
significantly negative, but the other cross terms (ΔROA*B, GSALE*B, and LOSS*B) are insignificant.
This indicates that bank-appointed directors do not help to enhance pay–performance sensitivity measured
as RET, but rather weaken them.
In the third column, the estimated result of equation (2) is reported. We find that the relations betweenchange in managerial compensation and ΔROA, RET, and GSALE are significantly positive and LOSS
is significantly negative. The coefficients on all the performance measures show the positive pay–
performance relations as well as the individual performance measure. The F-statistic for the cross terms of
the bank-appointed dummy and the performance measures (ΔROA*B, RET*B, GSALE*B, and LOSS*B)
is 2.35 and significant at the 10% level. This means a difference in the sensitivities between firms withand without bank-appointed directors. We also find that there are positive relations between change inmanagerial compensation and ΔROA, RET, and GSALE, whereas the relation between that and LOSS isnegative. The coefficients on RET*B and GSALE*B are significantly negative. This result is consistent
with hypothesis 2A. This implies that the pay–performance sensitivity of firms with bank-appointed
directors is relatively weak.

INSERT TABLE 6 HERE

14

We also analyze the disciplinary role of financial keiretsu memberships and bank-appointed directors
simultaneously. Table 6 also reports the estimated results including cross terms of firm performancemeasures and each of the financial keiretsu memberships and bank-appointed directors. In the second
column, we also confirm the positive pay–performance relations. Only the cross term of stock returns andbank-appointed dummy is significantly negative. This supports the result that the pay–performancesensitivity of firms with bank-appointed directors is relatively weak.
In the third column, we also find that the cross term of stock returns and the bank-appointed dummy issignificantly negative. In addition, the F-statistics for the cross terms of the bank-appointed dummy andthe performance measures (ΔROA*B, RET*B, GSALE*B, and LOSS*B) are significant at the 10% level
and those of both the bank-appointed dummy and financial keiretsu ties and firm performance measures
are significant at the 5% level. These results also support the idea that the disciplinary role of the bankappointed directors is relatively weak.
Our findings are summarized as the following two points. First, the financial keiretsu ties did notfunction well in enhancing the pay–performance sensitivities. Second, the role of bank-appointed
monitors was not effective. We can infer that the discipline of a relationship with financial keiretsu ties
and bank-appointed monitors did not operate well in the 1990s, although Japanese executives were
motivated by desirable incentive compensation.

5. Conclusions
This paper examined the relations between the role of Japanese disciplinary mechanisms such as
financial keiretsu ties and bank-appointed directors and pay–performance sensitivity in Japan. First, weanalyzed the differences in pay–performance relations between firms with and without financial keiretsu
ties. Second, we compared the differences in managerial compensation and firm performance between
firms with and without bank-appointed directors by regressing the cross term of bank-appointed directors
and performance measures.

15

Our findings provide new interpretations of previous Japanese studies such as Kaplan (1994), Katoand Kubo (2006), and Mitsudome et al. (2008) and are summarized as the following two points. The firstfinding is that there is no significant difference in pay–performance sensitivity between firms with andwithout financial keiretsu ties in this period. This result implies that the disciplinary role of financial
keiretsu memberships did not function well in the 1990s. This result suggests that the effective
disciplinary role of keiretsu in the 1980s as shown in Kato (1997) was weakened in the 1990s.
Second, we found that the pay–performance relations for RET and GSALE of firms with bankappointed directors are negative. This result implies that bank-appointed directors were not effective
monitors of managerial compensation in the 1990s.
In the 1990s, after the bubble-burst period, the Japanese relationship-oriented system was believed tobe mainly supported by the financial keiretsu memberships and bank-appointed monitors. Our results
indicate that Japanese executives were not well motivated under the relationship-oriented system in the
1990s.

Acknowledgements
Hideaki Sakawa is a COE visiting young scholar for the Global COE program “Research Unit for
Statistical and Empirical Analysis in Social Sciences” at Hitotsubashi University. An earlier version ofthis paper was presented at the 2007 Annual Meeting of the Japanese Economic Association, Nihon
University, and at a seminar at Osaka University. The authors are grateful to Yoshiro Tsutsui, Marc
Bremer, Jennifer Conrad, Keiichi Hori, Shinsuke Ikeda, Kotaro Inoue, Hideaki Kiyoshi Kato, Katsuyuki
Kubo, Hideaki Miyajima, Tatsuyoshi Miyakoshi, Takuji Saito, and Hirofumi Uchida for their valuablecomments. We also thank to all seminar participants. This study is financially supported by the 21st
century COE program funded by the Ministry of Education, Culture, Sports, Science and Technology andthe Murata Science foundation. All remaining errors are ours.

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Table 1
Definitions of variables
Variable

Definition

Dependent Variables
The change ratio of managerial

The percentage changes in average cash compensation per director. Averagecompensation

cash is comprised of salaries and bonuses of all board members divided by the(ΔCashComp, %）number of board members.

Firm Performance Variables
Differences in return on assets

The first differences in ROA (return on Assets: net profit divided by total(differences in ROA, %)assets).

Stock return (%)

The rate of stock return, measured as stock price at year end plus dividend pershare for the year dividend per share by the beginning stock price less one.

The growth rate of sales (%)

The rate of growth of sales

Loss/profit dummy

1 if a firm’s net profit is negative in year t, 0 otherwise.

Governance Variables
Financial Keiretsu dummy

1 if firms belong to financial Keiretsu, 0 otherwise.

(K,(1,0))Bank-appointed directors dummy

1 if a commercial bank appoints at least one director to the board, 0 otherwise.

(B, (1, 0))20

Table 2
Descriptive statistics
Variable

MeanMedianStd. dev.

Dependent Variables
The change ratio of managerial compensation–0.179–1.60619.178Differences in ROA (ΔROA, %)–0.187–0.0982.673

Stock return (RET, %)–6.294–7.25021.403Growth rate of sales (GSALE, %)–1.666–1.3699.292

Loss/profit dummy

0.162

0.000

0.369

Keiretsu dummy

0.113

0.000

0.317

Bank-appointed director dummy

0.387

0.000

0.487

(ΔCashComp, %)Firm Performance Variables

Governance Variables

Note. We report descriptive statistics for the total and split sample. In the right column, the p-value of the meandifferential statistics between the two periodically divided groups is reported.

21

Table 3 Descriptive statistics
Panel A Mean differences between firms with or without Financial keiretsu ties
keiretsu = 0

keiretsu = 1

Differences

Mean

Mean

p-value(n = 1,852)(n =236)-0.014-1.469Differences in ROA (ΔROA, %)-0.204-0.0500.403

Stock return (RET, %)-6.355-5.8190.717

Growth rate of sales (GSALE, %)1.833-0.204

0.166

Loss/profit dummy

0.161

0.174

0.615

Variable

Dependent Variables
The change ratio of managerial compensation(ΔCashComp, %)0.273

Firm Performance Variables

Panel B Mean differences between firms with or without Bank-appointed director
Bank = 0

Bank = 1

Differences

Mean

Mean

p-value(n = 1,279)(n = 809)–0.3560.101

Differences in ROA (ΔROA, %)–0.127–0.2810.201

Stock return (RET, %)–5.949–6.841

0.354

Growth rate of sales (GSALE, %)–1.504–1.922

0.317

Loss/profit dummy

0.148

0.185

0.023 **

Variable

Dependent Variables
The change ratio of managerial compensation

0.596(ΔCashComp, %)Firm Performance Variables

Note. In panel A, we report descriptive statistics for the total and split sample if firms belong to financial Keiretsu.
In the right column, we report the p-value of the t-statistic to test for differences in the means between the twogroups with and without financial keiretsu memberships. Panel B reports descriptive statistics for the total and split
sample if the board includes a bank-affiliated director. In the right column, we report the p-value of the t-statistic totest for differences in the means between the two groups with and without bank-affiliated directors.

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Table 4 Estimated coefficients for equations (1)
(1)

(2)

(3)

Independent Variable

The change ratio of Managerial

The change ratio of Managerial

compensationcompensation(1 Variable, %)(4 Variable, %)Differences in ROA

1.163

***

0.785 ***(ΔROA)(0.000)(0.000)Differences in ROA-0.078-0.388(ΔROA)*Keiretsu(0.873)(0.334)R-squared

0.041

Stock return (RET)0.223 ***

0.151 ***

(0.000)(0.000)Stock return (RET)

0.087

0.096

* Keiretsu(0.154)(0.124)R-squared

0.048
25.770 ***11.164(0.000)(0.105)Growth rate of sales (GSALE)

19.18619.156* Keiretsu(0.193)(0.183)R-squared

0.033

Growth rate of sales (GSALE)-9.176 ***-5.197 ***(0.000)(0.000)Loss/profit dummy-2.297-1.361* Keiretsu(0.283)(0.607)R-squared

0.049

0.082

Loss/profit dummy

F-statistic (All cross-terms of

1.78

Keiretsu Dummy= 0)(0.129)Note. The change ratio of Managerial compensation is regressed against the independent variables in column (1). In
column (2), we show the regression results using individual performance variables and their cross-terms of thefinancial keiretsu dummy. In column (3), we show the regression results using all performance variables and theircross-terms of the financial Keiretsu dummy. All independent variables are measured from t–1 to t. All regressions
include dummy variables for the time period. P-values are in parentheses. Superscripts *, **, and *** denotesignificance at 10%, 5%, and 1% levels, respectively. The null hypothesis of the F test is that all cross terms ofkeiretsu dummy variables are equal to zero.

23

Table 5 Estimated coefficients for equations (2)
(1)

(2)

(4)

Independent Variable

The change ratio of Managerial

The change ratio of Managerial

compensationcompensation(1 Variable, %)(4 Variable, %)Differences in ROA

1.056

***

0.717 ***(ΔROA)(0.000)(0.000)Differences in ROA (ΔROA)*

0.290

0.203

Bank dummy(0.463)(0.623)R-squared

0.042

Stock return (RET)0.260 ***

0.199 ***

(0.000)(0.000)Stock return (RET)-0.084**-0.127 **** Bank dummy(0.041)(0.005)R-squared

0.050
34.531 ***22.424 ***(0.000)(0.001)

Growth rate of sales (GSALE)-17.667-23.618 ** Bank dummy(0.162)(0.067)R-squared

0.034

Growth rate of sales (GSALE)-9.548 ***-4.594 ***(0.000)(0.003)

Loss/profit dummy

0.222-2.274* Bank dummy(0.912)(0.320)R-squared

0.049

0.087

Loss/profit dummy

F-statistic (All cross-terms of

2.35 *

Bank Dummy= 0)(0.052)Note. The change ratio of Managerial compensation is regressed against the independent variables in column (1). In
column (2), we show the regression results using individual performance variables and their cross-terms of the bankappointed director dummy. In column (3), we show the regression results using all performance variables and theircross-terms of the bank-appointed director dummy. All independent variables are measured from t–1 to t. All
regressions include dummy variables for the time period. P-values are in parentheses. Superscripts *, **, and ***denote significance at 10%, 5%, and 1% levels, respectively. The null hypothesis of the F test is that all cross-termsof bank-appointed director dummy variables are equal to zero.

24

Table 6 Estimated coefficients for equations (1) and (2) simultaneously
(1)

(2)

(3)

Independent Variable

The change ratio of Managerial

The change ratio of Managerial

compensationcompensation(1 Variable, %)(4 Variable, %)Differences in ROA

1.059 ***

0.753 ***(ΔROA)(0.000)(0.001)

Differences in ROA (ΔROA)*-0.038-0.444

Keiretsu(0.938)(0.304)

Differences in ROA (ΔROA)*

0.288

0.204

Bank dummy(0.468)(0.626)R-squared

0.042

Stock return (RET)0.255 ***

0.196 ***

(0.000)(0.000)Stock return (RET)

0.081

0.095

* Keiretsu(0.188)(0.131)

Stock return (RET)-0.082**-0.127 **** Bank dummy(0.047)(0.005)R-squared

0.051
33.082 ***21.102 ***(0.000)(0.001)

Growth rate of sales (GSALE) *20.90323.770 *Keiretsu(0.145)(0.097)Growth rate of sales (GSALE)*-18.313-25.027 *Bank dummy(0.148)(0.054)R-squared

0.034

Growth rate of sales (GSALE)-9.238 ***-4.261 ***(0.000)(0.010)Loss/profit dummy-2.286-0.941* Keiretsu(0.285)(0.719)Loss/profit dummy

0.137-2.533* Bank dummy(0.946)(0.271)R-squared

0.049

0.089

Loss/profit dummy

25F-statistic (All cross-terms of

1.87

Keiretsu Dummy= 0)(0.114)2.37 *

F-statistic (All cross-terms of Bank
Dummy= 0)(0.052)F-statistic (All cross-terms of

1.95**

Keiretsu Dummy= cross-terms of(0.049)Bank Dummy= 0)

Note. The change ratio of Managerial compensation is regressed against the independent variables in column (1). In
column (2), we show the regression results using individual performance variables and their cross-terms of both
Keiretsu and the bank-appointed director dummy. In column (3), we show the regression results using all
performance variables and their cross-terms of both Keiretsu and the bank-appointed director dummy. All
independent variables are measured from t–1 to t. All regressions include dummy variables for the time period. Pvalues are in parentheses. Superscripts *, **, and *** denote significance at 10%, 5%, and 1% levels, respectively. The
null hypothesis of the F test (All cross-terms of Keiretsu Dummy= 0) is that all cross-terms of Keiretsu dummy
variables are equal to zero. The null hypothesis of the F test (All cross-terms of Bank Dummy= 0) is that all crossterms of bank-appointed director dummy variables are equal to zero. The null hypothesis of the F test (All crossterms of Keiretsu Dummy= cross-terms of Bank Dummy= 0) is that all cross-terms of Keiretsu and bank-appointed
director dummy variables are equal to zero.

26