2006・27
Share Repurchase Behavior of Japanese Banks

Takashi Hatakeda

Share Repurchase Behavior of Japanese Banks

Takashi Hatakeda1

Graduate School of Business Administration, Kobe University, 2-1 Rokkodai, Nada,
Kobe, Hyogo 657-8501, Japan

May, 2006

Abstract

According to Article 210 of the Commercial Law, a bank (or a firm) with an intention of
repurchasing shares has to make two decisions at the board of directors. The one is thedecision about whether a bank has a tendency of repurchasing shares in the future or
not and then about how many shares she repurchase if she does so. The other is thedecision about how many shares she repurchases shares actually in the authorization
period. In our paper we show the empirical evidence that non-performing loans and (or)the capital to asset ratio have a crucial influence on two decisions in the Japanesebanking industry.

JEL classification: G14; G21; G32;
Keywords: Bank; Stock repurchase; non-performing loans; the capital to asset ratio

1 Tel: +81-78-803-6902. E-mail address: hatakeda@kobe.u-ac.jp

1. Introduction

Though Japanese commercial law had banned domestic firms fromrepurchasing their own shares until October 1994, the revision of the commercial law
made it possible for them to buy back and cancel their outstanding shares in order to
distribute earnings to shareholders. As, however, there were severe obstacles which
prevent them from utilizing share repurchases as a payout policy, the commercial law
was more revised at frequent intervals and the Special Case Law of share repurchases
was also introduced.2 As a result, share repurchases have becoming an important
method of the payout policy for corporations in Japan similar to U.S.3
Since October in 2001, firms with an intention of repurchasing shares have toundergo the following process at the board of directors and the shareholders’ meeting.
In the first place, a firm has to initiate a resolution on share repurchases at the
beginning of the fiscal year. The target yen amount of a repurchase program, the target
number of shares, the kind of shares, and so on are stipulated in the initiated resolution,
which must be approved in the shareholder meeting. Secondly, she can be free to decideto repurchase its own shares on the ground of the approved resolution. There, thus, are
two decisions about share repurchases; a planning decision and an execution decision. It,

2 In Appendix A, we illustrate the regulatory and institutional background of share repurchases in Japan.
3 See, for example, Vermaelen (1981), Barclay and Smith (1988), Bagwell and Shoven (1989), Wansley and Sarkar(1989), Comment and Jarrell (1991), Ikenberry, Lakonishok and Vermaelen (1995), Cudd, Duggal and Sarkar(1996) Liu and Ziebart (1997), Grinblatt and Titman (1998), and Grullon and Michaely (2002). For example,
Grullon and Michaely (2002) report that, over the past 20 years, stock repurchase expenditures grew at a muchhigher rate than cash dividends. In Japan, 48% of all firms which have been listed on the First Section of the Tokyo
Stock Exchange made share repurchase announcements in the period from October, 2001 to December, 2002 (See
Hatakeda (2005)).

2

therefore, is interesting for us to examine what factors affect two decisions on share
repurchases.
This revision in 2001 was also drastic in a sense that it has made it possible forfirm’s managers not only to buy back their own shares without declaring the purposes
but also to hold repurchased shares without canceling or reselling them at once. It
seems that this revision enhances the availability of repurchasing shares. Indeed,according to aggregate data from IN Information System Ltd, the number of the
repurchase announcements increased significantly from 485 over four years 1997 - 2000
to 1361 in two years of 2001 - 2002. In addition, the total number of shares which havebeen inscrolled in the repurchase programs in 2001 and 2002 increases 2.5 times aslarge as the total amount over the years of 1997 - 2000.
The purpose of our paper is to manifest what factors have a crucial influence on
the planning decision and the execution decision about share repurchases in Japanesebanking industry. As we have mentioned before, it is thought that the revision of theCommercial Low in 2001 have a different impact on a share repurchase behavior frombefore. We, therefore, focus on the repurchase behavior since October 2001 in order toisolate the structural effect due to the revision of the Commercial Law.
The distinctive feature of our paper is to shed a light on the repurchasebehavior in the Japanese banking industry. The increased prominence of share
repurchases in the banking industry mirrors the growth of share repurchases by
non-financial firms, which has been documented by a number of studies (see, forexample, Zang (2002), Hatakeda and Isagawa (2004) in Japan), so one question thatarises is whether analysis of share repurchases by financial firms—in particular,banks—would offer any further insights or not. At the same time, the circumstance in3which banks operate has changed drastically in this decade. Until the early 1990s theJapanese financial system was often mentioned as having typical bank-based system inthe contrast with the market-based systems in the U.S. The Japanese government wasalso instrumental in the development of the main bank system. Japanese banks hadenjoyed monopolistic rent in a bank-based financial system until the early of 1990s (i.e.
main bank system, the convoy system between banks, cross share holdings). Banks,
however, have experienced the 1990s’ economic stagnation and the drastic change into amarket-based financial system. 4 Bank’s rent has been extinguished by a huge of
non-performing loans and by cutthroat competition among financial intermediations.
Furthermore, the decrease in Japanese bank’s latent capital gains, which is called as
Fukumi Eki, has caused a lot of damage to bank’s equities for this decade, so that banks
suffered from the low capital asset ratio.56 Accordingly, it is interesting to examine
whether or not non-performing loans and bank’s equities affect her decisions regarding
the target for share repurchases and its execution.
The remainder of our paper is organized as follows. In section 2, we discuss thedata set used in our study and present the descriptive statistics. In section 3 and 4, we
4 Large firms that had ever had a close relationship with banks changed from bank financing to capital-market
financing. It is supposed that A great decline in bank’s share prices makes banks reduce the share of thebank-shareholding and the number of board members accepted from banks. According to Hoshi and Kashyap (2001),
in the period between 1975 and 1997, the average bank-borrowing to sales ratio declined from 35 % to 22 %, theaverage ratio of firms for which a bank is the largest equity holder declined from 13 % to 9 %, and the average ratioof firms with any bankers on their Boards declined from 55 % to 51 %. As a result, Japanese banks could not help
but increase the share of assets allocated to lending to small and medium firms.
5 In 1998-1999 and 2001 the Japanese economy has experienced the most serious recessions. Standard & Poor’s
Rating Service reports the average rating have deteriorated by BBB since 1998, compared to AA minus in 1990.
6 Latent capital gains are defined as the difference between the low book value and the market value of shares
which have been held by banks. The Japanese banks traditionally have held a large amount of stocks of othercompanies as a part of long-term business relationship, keiretsu.

4estimate our models that relate various factors to bank’s decisions regarding the target
for repurchase shares and regarding its execution, and then discuss our results
obtained, respectively. Finally, in section 5, we contain summary and conclusions.

2. Data and Univariate Analysis of Repurchases

Using the Nikkei Needs Financial Quest, we extract all the commercial banks
that appear on the files in the fiscal years of 2000-2002. Our sample consists of 95 banks
that were traded in the 1st and 2nd Section of the Tokyo, Osaka, Fukuoka, Nagoya
Stock Exchange, and over the counter market (OTC) in the periods from April 1, 2000 to
March 31, 2003. They are composed of City banks (5 banks) and Regional banks (90banks).7 We delete commercial banks with missing or inconsistent data and those thatexperienced large mergers and acquisitions. In Japan, the removal of a ban on financial
holding companies in March 1998 led to large mergers and acquisitions in City banks
and some of regional banks by March 2002. Consequently, our sample ultimately
consists of 85 Regional banks without a financial holding company structure.
Table 1 reports summary statistics in the fiscal years of 2000-2002 for the fullsample and for the two subsamples of Japanese banks: Total, Repurchase Group[RG],

7 City banks have now adopted a financial holding company structure and have been extending their business tothe various areas. Although they primarily have played a role of the suppliers of short-term funds to large
corporations, they have recently begun to focus on developing the longer-term end of their business. Additionally,
they have been forced to cultivate clients from amongst the smaller corporate fry and from the personal sector. The
top four city banks, by assets size, are some of the largest banks in the world. Regional banks are smaller in scalethan City banks, and usually confine their operations to the principal cities of the prefectures in which their head
offices are located. Accordingly, their local ties are strong, with the bulk of their lending going to small andmedium-sized companies in the locality.

5and Non-Repurchase Group[NGR]. Here, RG consists of 45 banks with an intention of
repurchasing shares. On the other hand, NRG consists of 40 banks with no intention.8
On average, banks with a large asset size ( SIZE ), current low-profitability( ROA ) and stable investment opportunities ( M / B ) tend to repurchase their own
shares. Additionally, banks with a low nonperforming loan ratio ( NPL L )9, a low loan
ratio for the small and medium firms ( SMALL ), and a high capital-asset ratio ( ECR 10)

8 According to Article 210 of the Commercial Law, a bank with an intention of repurchasing its own shares has topass through the following steps. First of all, the board of directors decides to initiate a repurchase program at the
beginning of the fiscal year. And then the board sends a notice to the stock change and makes a publicannouncement of the repurchase plan through mass media (TV, newspapers, radio, and so on) without delay.
Secondly, the proposed resolution to repurchase shares has to be approved at shareholder meeting. Until the next
year’s shareholders meeting, the bank can be free to carry out share repurchases based on the approved resolution.
9 There are three measures of non-performing loans (NPL/L) in Japan. The first measure is risk managementloans, which is published by each bank on its financial statement. The second is self-classified loans, which is basedon the classification of loans that the Financial Supervisory Agency uses in bank examinations. The third isclassified loans by the Financial Reconstruction Commission. Though risk management loans have been madeavailable beginning with the year ended March 1993, its definition has changed by March 1999. Although thedefinition by the second measure is substantially broader than that of the first and third measures, a majority of
non-performing loans defined by the second measure are considered recoverable. The third measure is slightly
broader than that of risk management loans (For further details of three definitions of non-performing loans, see
Hoshi and Kashyap (1999, 2001)). We use risk management loans which are published by each bank on its financial
statement as non-performing loans. Risk management loans consist of loans to failed enterprises, loans on which
payments are suspended for more than three months, and loans with relaxed conditions (restructured). As of March
2002, risk management loans totaled just over ¥42 trillion, or 7.9% of Real GDP.
10 Unlike other industries, in order to support safe and sound banking system, the banking industry is required tokeep a flat minimum percent of capital against risk-weighted assets, which are the sum of the total weighted assets
where weights are set larger for the riskier assets. (See Hall (1993)). In Japan, there are two types of banks:international and domestic banks. They are held to different standards respectively. The Basel Accord requires
internationally active banks to maintain a capital to risk-weighted asset ratio of at least 8%. On the other hand,
Japanese regulators allowed banks with purely domestic business the option of maintaining the capital ratio of atleast 4%. We defined ECR as the risk-based capital ratio reported in bank’s financial statement less theinternational standard (8%) or the domestic standard (4%).

6do so. Finally the percent of equity held by 10 largest shareholders ( SHARE ) in RG issmaller than that in NRG. However, its volatility in NRG is relatively larger than thatin RG.
Table 1 also reports two repurchase target ratios in RG; TAR [Number ] andTAR [Yen] 11 , and two execution ratios; EXR [Number ] and EXR [Yen] 12 in the fiscal
years of 2002. Banks in RG set up the mean target ratio to 4% and execute only 25% of
the target. Both ratios are lower than those in firms excluding from financial
intermediaries. For example, Hatakeda (2005) reported that the mean target ratio is
6 % and that the mean execution ratio is 40%.13 It is considered that this low execution
ratio is led to by severe environments which surround Japanese banks, such as thedeterioration of share prices and land prices, a large number of accumulated
non-performing loans, and the low capital asset ratio due to the economic stagnation,and then disintermediation, which large firms in Japan tend to finance funds by issuingequities rather than bank loans.
Before discussing what factors affect bank’s decisions regarding share
repurchases, we should examine the possibility that banks make use of cash dividends
as substitutes for share repurchases in order to return banks’ own profits into their
11 TAR[Number] represents the ratio of the number of the targeted shares to the total number of outstanding
shares. TAR[Yen]represents the ratio of the yen value of the targeted shares to the end-of-period value of theoutstanding shares.
12 EXR[number] is expressed as a ratio of the number of shares executed to repurchase against the number ofshares targeted. EXR[Yen] is expressed as a ratio of the market value of shares executed to repurchase against theyen value of the target shares .
13 Stephens and Weisbach (1998) reported the mean target ratio was 7% and that the mean execution ratio was
54% for open-market repurchase programs in US Market for the period from 1981 to 1990. In particular, theexecution ratio in Japan is lower than those in U.S. Thus, although Japanese firms made a large number of
repurchase announcements, they could repurchase a few shares actually. It seems that this low execution ratio isdue to economic stagnation in the periods from 2001 to 2003.

7

shareholders. If cash dividends are substitutes for share repurchases in the Japanesebanking industry, banks which pay out less cash dividends or omit cash dividends might
attempt to set up the high target for share repurchases and execute to repurchase moreshares.14
Table 2 is descriptive statistics concerning cash dividends and share
repurchases across two groups in the fiscal years of 2000-2002. From Panel (1) andPanel (2), we find no evidence that share repurchases are substitutes for cash
dividends.15 Although dividend-paying banks both in RG and in NRG make the same
payments per a unit share, banks which pay cash dividends tend to repurchase theirown shares in order to distribute more profit to shareholders. In Panel (3), furthermore,
we can obtain the evidence that there exists a significant and positive correlation
between actually repurchased amounts and dividend payments.
In sum, our evidence suggests that there is no substitution between share
repurchases and dividends. It, if anything, seems that banks make use of share
repurchases as a complementary method of paying out profits available for distribution.

3. Decision Regarding the Repurchase Program

According to Article 210 of the Commercial Law, a bank (or a firm) with anintention of repurchasing shares has to make two decisions at the board of directors.
The one is the decision about whether a bank has a tendency of repurchasing shares in
14 Empirical results for this substitution hypothesis are mixed. For example, Bagwell and Shoven (1989), Grullon
and Michaely (2002) reported the evidence that dividends and repurchases are substitute in U.S. On the other hand,
Jagannathan et al. (2000), DeAngelo et al (2000), Fama and French (2001) reported the opposite evidence that
there was no substitution in U.S.
15 There is a statistically significant difference in the mean (median) of the ratios across two groups8the future or not and then about how many shares she repurchase if she does so. The
other is the decision about how many shares she repurchases shares actually in theauthorization period. In this section we focus on the former decision. And then we
discuss the latter decision in section 4.
We estimate several kinds of regression models which relate bank’s
individual-specific characteristics to the first decision on its repurchase plan. We
construct the repurchase target ratios; TAR [Number ] and TAR [Yen] as a observed
dependent variable y i . TAR [Number ] represents the ratio of the number of thetargeted shares to the total number of outstanding shares as of March 31, 2002.
TAR [Yen] represents the ratio of the yen value of the targeted shares to the market
value of the outstanding shares as of March 31, 2002. These are censored variables ofwhich the value are larger than zero if the decision regarding the share repurchaseprogram is made by the board of directors, zero otherwise. Therefore, our model isy i* = β ' x i + u i ,(1)

if y i > 0 , y i = TARi [Number ] or TARi [Yen]*if y i ≤ 0 , y i = 0 .
**where y i denotes the latent variable, x i denotes a vector of explanatory variables
likely to affect the decision regarding the target for repurchase shares, and u i denotes
the error term which follows a normal distribution with mean zero and variance σ 2 .

9Following to a large number of literature about firm’s payout policy16, we
employ the following variables as explanatory variables; a constant term, the log of total
assets ( ln (SIZE ) ), the current profitability ( ROA ), and the market-to-book ratio( M / B ). In our paper, M / B is served as a proxy for growth opportunities.
Unlike other types of industries, the bank industry is subject to the influence ofsome regulations and obligations which require them to carry out sound management.
In order to examine these influences, we append two variables to our model. The one isthe excess capital to asset ratio ( ECR ), which is calculated as the risk-based capitalratio reported in bank’s financial statement less the required ratio which the bank has
to keep (4% or 8%).17 The other is the ratio of non-performing loans to total loans andbills discounted ( NPL / L ). Our prediction is that banks with low ECR and high

NPL / L can not help resigning to pay back shares or setting the lower target ratio even
if they have an intention with repurchases.
All of explanatory variables which we utilize are the end-of-previous-period
values, since the board of directors makes a decision on the repurchase plan at the
beginning of the fiscal year. Therefore, all the explanatory variables are pre-determined.
We estimate the parameters β and σ by the maximum likelihood (ML) method.18 19

16 See, for example, Stephens and Weisbach(1998), Fama and French (2001), DeAngelo, et al.(2006).
17 See footnote 10.

18 The likelihood function for this model (1) is given by1 ⎛⎜ y i − β ' x ⎞⎟⎛ − β'x ⎞
φ
Φ⎜
⎟
∏
y
=
0
⎟
⎜
i σ
i
σ
⎝ σ ⎠
⎠
⎝
.

L(β , σ | y i , xi ) = ∏ y = y*i( ) and Φ(⋅) are the density function and the distribution function of the standard normal, respectively.

where φ ⋅We estimate the parameters

β and σ by maximizing the log-likelihood function. For details of the censored

regression model, see Wooldridge (2002).
19 We, of course, include the constant term in estimating our models.

10

In Table 3 we present estimation results for the models in which either

TAR [Number ] or TAR [Yen] is used as the dependent variable. In Panel (1) and Panel(3), we present the results for our benchmark model, which the explanatory variables
are a constant term, ln (SIZE ) , ROA , and M / B . From our result that the coefficientson ln (SIZE ) and M / B is significant at the 1% level, we find the evidence that smallbanks with a low investment (lending) opportunity are likely to set up the higher target
for repurchasing their own shares.
In Panel (2) and Panel (4) we present the results for the augmented model with

ECR and NPL / L as additional explanatory variables. We find that the coefficient on
NPL / L is negative and significant in both columns at the 1% level, although thecoefficient on ECR is positive but insignificant in both columns. Our result suggeststhat an increase in non-performing loans reduces bank’s available funds for repurchases
because she has to increase the provisions for possible loans losses, so that banks withlarge nonperforming loans can not help resigning to pay back shares or setting thelower target for repurchase.
Since the early 1990s, banks have experienced a decrease in cross-shareholdings, with a process of the deregulation of Japanese capital market.20 So, somebanks may attempt to make use of share repurchases in order to maintain corporate
governance desirable for them. To discuss this possibility, we re-estimate the model towhich we adds the change of the ratio of outstanding shares owned by the largest
shareholders ( ΔSHARE ) as an explanatory variable.
Table 4 provides the results for TAR [Number ] and for TAR [Yen] as adependent variable, respectively. The coefficients on ln(SIZE ) , ROA , M / B , ECR , and

20 See Okabe (2002).

11

NPL / L are almost similar to the pervious results. What should be noted is that thecoefficient on ΔSHARE is insignificant in the case of both TAR [Number ] andTAR [Yen] . These results indicate that, even if banks experience the decline ofoutstanding shares owned by large shareholders, they do not attempt to set up the hightarget for share repurchases in order to remain the capital structure unchanged.

4. Decision Regarding Repurchase Execution

Banks which have set the repurchase program do not necessarily have to
execute repurchases until the set target. Indeed, some banks execute no repurchases atall. In this section, we discuss what factors affect a bank’s decision regarding theexecution of share repurchases.
The estimation procedure is almost similar to that of section 3, but is different
in three respects. The first is that we use the execution ratio in place of the target ratio
as a dependent variable. We utilize the financial statements in 2003 to calculate two
execution ratios; EXR [Number ] and EXR [Yen] , which represent the degree of actual
share repurchases. The former is defined as the number of the repurchased shares andthe latter is its yen value.21 These variables are also censored variables, whose thevalue are lager than zero if an execution decision is made, zero otherwise.22
Secondly, when a bank repurchases its own shares actually, the board of

21 The former is expressed as a ratio of the number of shares executed to repurchase against the number of shares
targeted. The latter is expressed as a ratio of the market value of shares executed to repurchase against the yenvalue of the target shares .
22 In our sample, max value of the execution ratio is less than 100% irrespective of the execution ratio. Additionally,
19 of 40 banks which have set the repurchase program did not execute share repurchases after all.

12

directors is likely to carry out timely with watching the trend of the share priceperformance. To allow for this factor, we use the cumulative abnormal return from the
day after the shareholder’s meeting to the day before the execution ( LCAR 23) in place ofthe proxy for the profitability to our model.24 Some banks conduct the execution of
repurchases in twice or more times. In calculating LCAR , we focus only on the first timeof the repurchase execution in order to avoid the history effect.
The third is that we use the explanatory variables are based on a bank’s
financial statements in 2003, because banks carry share repurchases into execution
depending on the fundamental and financial situations that they face at present.
Therefore, in order to allow for the endogeneity of the explanatory variables M / B ,ECR , ROA , and ΔSHARE , we estimate the Tobit model with endogenous variables25by the maximum likelihood estimation. In estimating our model, we utilize the constantterm, ln(SIZE ) , LCAR and the one-lagged and two-lagged values of M / B , ECR , andSHARE as instrumental variables.
In Table 5 we present our estimation results for EXR [Number ] and EXR [Yen]as a dependent variable. Although the coefficient of ln(SIZE ) and M / B is not
significant in both models, the coefficient of LCAR is negative and significant at the
1% level in both models. These results indicate that a bank attempt to repurchase hershares actually, when her share price declines.
The coefficients of ECR are positive and significant at the 5% level for the
23 If a bank has not executed repurchase its shares in the end, LCAR is defined as the cumulative abnormal returnfrom the day after the shareholder’s meeting to the day before the next shareholder’s meeting.
24 US’s current disclosure standards, as regulated by the FASB and the Securities and Exchange Commission(SEC), impose an obligation on firms to disclose the number of shares repurchased at quarter-end. On the other
hand, in Japan Securities and Exchange Surveillance Commission (SESC) required firms to disclose repurchasedetail. In particular, we can know the trading dates.
25 See Appendix B.

13

case of dependent variable EXR [Number ] and at the 10% level for the case of
dependent variable EXR [Yen] . These results indicate that banks have a positive
incentive to make a decision to execute share repurchases when they have the sufficientvolume of their own capital. Furthermore, NPL / L are also positive and significant at
the 5% level in both models. Thus, the volume of non-performing loans has large
influence on the repurchase execution as well as its plan.
In Table 6 we present our estimation results in order to examine the effect of
the share ratio by the largest shareholders ( ΔSHARE ) on the decision regarding the
repurchase execution. The coefficients of ΔSHARE in both models are insignificant,suggesting that the decline of outstanding shares owned by the largest shareholders
have less effect on the execution of share repurchases. It seems that banks do not makeuse of share repurchases as countermeasures against the cancellation of thecross-shareholdings.

5. Conclusions

In our paper, we examined the factors which affect a bank’s decision regarding
the repurchasing program and regarding the execution of repurchases. According to our
results, the degree of non-performing loans has a negative effect on both decisions.
Furthermore, the degree of the capital asset ratio has a positive effect on the decision
regarding the execution of repurchases.
As our additional finding, we examine the possibility that, when banks
experienced the decline of cross-shareholdings, they tend to set up the high target forshare repurchases and execute repurchases actually in order to maintain the optimal

14

capital structure. However, we could not find the evidence that this possibility is
supported.
Finally, we should notice that our empirical results may reflect the repurchasebehavior of banks without a financial holding company structure. Large mergers andacquisitions such as a financial holding company structure may have an effect on the
bank’s share repurchase behavior. These issues are topics of future research.

Appendix A: Stock Repurchases of Japanese Firms
Prior to 1994, Japanese firms had been in principle prohibited to buy back theiroutstanding shares. The revision of the Commercial Law (Article 212-2) in October,
1994 has enabled firms to buy back their outstanding shares on the basis of theresolution which had to be approved at a regular shareholder’s meeting. This resolution
has been effective until the next shareholder’s meeting. The funds used for repurchases
have to come from the profit available for dividends. However, under Japanese
accounting rules of those days, a ‘presumed’ dividend tax was imposed in buying backtheir standing shares. In fact, share repurchases were effectively nonexistent until
November, 1995, when the presumed dividends for share repurchases have been frozen.
In addition to Article 212-2 of the Commercial Law, the Japanese government
enforced Article 3-1 of the Special Case Law in June, 1997, Article 3-2 in March, 1998,
and Article 3-3 in March, 1999. Under Article 3-1, the board of directors was allowed to
execute share repurchases without approval at a regular shareholders’ meeting once theagreement on repurchases was provided in the articles. Article 3-2 and 3-3 allowed
firms to use capital reserves and latent capital gains on lands for business to repurchaseshares.
In contrast to Law Article 212-2 of the Commercial Law, Article 3 of the Special
Case Law had the advantage that the board of directors was allowed to elastically
execute share repurchases. It, however, had the disadvantage that the funds used for
repurchases and the number of repurchased shares were restricted. A large number offirms which executed share repurchases were based on Article 3 of the Special Case forthe period from 1999 to 2001.
Furthermore, the Commercial Law revised in October, 2001, so that thetreasury shares were introduced and the Special Case Law was dropped. Not only the15

2001’s revision of the Commercial Law had the advantage of the Special Case Law,under which firms elastically execute share repurchases, but also it enabled them tohold shares repurchased for the period. This implies that firms do not have to dispose
repurchased shares immediately, indicating that they also have the opportunity to wait
for their shares to rise before reselling their shares.
Appendix B: The estimation of the Tobit model with endogenous variables
In estimating the Tobit model with endogenous variables, we formulate thefollowing simultaneous model:

y i* = γ ' x1i + δ ' xi2 + u ixi2 = π 1 ' xi1 + π 2 ' z i + vi
where y i* denotes the latent variable, x1i is a vector of predetermined variables, xi2
is a vector of endogenous variables, and z i is a vector of exogenous (instrumental)

variables. (u i , v i ) is normally distributed with mean zero and variance,⎡σ 2 ρ ⎤.
Σ =⎢2⎥⎣ρ τ ⎦

In our model, x1 denotes a vector of one, ln(SIZE ) and LCAR , x 2 denotes avector of M / B , ECR , NPL / L , and ΔSHARE , and z denotes a vector of the first andsecond lagged variables of M / B , ECR , NPL / L , and SHARE . The observed
dependent variable y i = EXR [Number ] or y i = EXR [Yen] is the value if y i* > 0 , y i = 0 ,otherwise. The likelihood function for this model is given by12⎛ y − π 1 ' x 1i − π 2 ' z i ⎞⎞⎛⎟∏ * 1 φ ⎜ y i − γ ' xi − δ ' x i − θvi ⎟L γ , δ , π 1 , π 2 , σ 2 ,τ 2 , ρ | y i , xi = ∏ φ ⎜ i
y
=
y
⎜
⎟
⎟
i
i
τ
η
τ 1 ⎜⎝⎝⎠⎠()⎛ − γ ' x 1i − δ ' xi2 − θv i ⎞⎟× ∏ y =0 Φ⎜
⎜
⎟
i
η
⎝
⎠
where η 2 = σ 2 −ρρand θ = 2 . We omit the estimated results of coefficients π 1 ' and
2
τ
τ

16

π 2 ' from Table 5 and 6 for want of space.
[2006.5.31 767]

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18

Table 1. Summary of Statistics
Total
Variables
SIZE (Billion Yen)

Mean
2603.35

MedianRepurchase Group [RG]
Standard
Deviations

2116.39

1929.98

Mean
3135.72

Median

Non-Repurchase Group [NRG]Standard
Deviations

2790.94

1994.63

Mean
2004.44MedianStandard
Deviations

1727.59

1684.99

ROA (%)

0.602

0.583

0.218

0.577

0.583

0.205

0.630

0.585

0.234

M/B (%)

99.94

100.15

1.49

99.71

100.091.30

100.20100.34

1.68

NPL/L (%)

7.75

6.81

2.90

6.61

5.70

2.13

9.02

8.34

2.97

SMALL (%)

81.70

83.88

8.75

76.66

77.11

8.58

87.37

90.19

5.67

ECR (%)

4.68

4.82

1.50

5.20

5.27

1.46

4.09

4.55

1.36

SHARE (%)

28.95

26.33

10.45

26.18

24.46

4.78

32.06

29.39

13.70

TAR [Number] (%)

-

-

-

3.64

2.63

2.49

-

-

-

TAR [Yen] (%)

-

-

-

4.35

3.28

3.14

-

-

-

EXR [Number] (%)

-

-

-

26.82

14.33

31.84

-

-

-

EXR [Yen] (%)

-

-

-

22.86

13.81

26.87

-

-

-

Number of Observations

255

135

120

Notes: SIZE is defined as the sum of the book value of debt and the market value of equity. Here, the market value of equity is defined as the product of the share priceand the number of outstanding shares. The share price is the end of the fiscal year. If the price is not available for the last day of the fiscal year, the next earliest
available price is used. M/B is defined as the percentage of (the sum of the book value of debt and the market value of equity)/(the sum of the book value of debt and thebook value of equity). NPL is defined as the percentage of risk management loans (the sum of loans to bankrupt borrowers, non-accrual delinquent loans, loans past due
for 3 months or more, and restructured loans) / total loans and bills discounted. ECR is defined as the risk-based capital to asset ratio minus the international standard(8%) or the domestic standards (4%). SHARE is defined as the percentage of outstanding shares owned by the largest shareholders. SMALL is defined as the percentage
of loans for medium and small firms / total loans and bills discounted. TAR[Number] and TAR[Yen] are defined as the percentages of the announced target shares andyen value for repurchase, respectively. TAR[Number] represents the percentage of the number of shares targeted for repurchase to the total number of outstanding
shares. TAR[Yen] represents the percentage of the yen value of shares targeted for repurchase to the market value of outstanding shares as of March 2002.
EXR[Number] and EXR[Yen] are defined as the percentage of the actually repurchased shares and yen value up to the date of the next shareholder meeting.
EXR[Number] represents the percentage of the number of actual repurchased shares to the number of the target shares. EXR[Yen] represents the percentage of the yenvalue of shares repurchased actually to the yen value targeted for repurchase.

19

Table 2. Descriptive Statistics Concerning Cash Dividends and Share Repurchases: The Period form 2000 and 2002
Repurchase Group [RG]

Non-Repurchase Group [NRG](N=45)(N=40)

Dividend payments

135

91

(ii) Interim dividend payments

135

76

Either (i) or (ii)

135

92

Mean

5.30

3.38

Median5.00

5.00

Standard Deviations

0.55

2.16

Panel (1)(i)

Panel (2)Panel (3)

Number of BanksDividends(per a unit of share)

Correlation

Between Executed amount and Dividend payments

0.54

Note: ***, **, and * present significant at the 1%, 5%, and 10% levels, respectively.

20

***

Table 3. Tobit Estimates Predicting the Target for Share Repurchases
The table provides estimates of the relation between the target for share repurchases and variables likely to affect the repurchase decision. Our dependent variables are
TAR[Number] and TAR[Yen]. These are censored variables of which the value are larger than zero if the resolution regarding the target for share repurchases is made by
the board of directors, zero otherwise. We estimate the one-tailed Tobit model truncated at 0%. As explanatory variables, we utilize the constant term, the logarithm of
SIZE, which is defined as the book value of Total Assets minus Equity plus the market value of Equity, the market to book value ratio M/B, the excess capital to asset
ratio ECR, which is defined as the risk-based capital ratio reported in bank’s financial statement less the required capital ratio, and the ratio of non-performing loans tototal loans NPL/L. Sigma denotes the standard deviation of the disturbances in the Tobit model.
Dependent Variable = TAR[Number]
Independent Variables

Panel (1)Dependent Variable = TAR[Yen]Panel (2)Coefficientst-ratiosln(SIZE)

1.773

2.77

ROA

-0.023-1.20

M/B-0.906

-2.58

***
***

Panel (3)Coefficientst-ratios

Coefficients

1.282

2.08

2.213

-0.015-0.73-0.713

-2.01

**
**

ECR

0.409

1.23

NPL

-0.559

-2.77

***

3.588

8.73

***

Sigma
Pseudo-R2

3.850

8.63
0.224

***

0.230

Panel (4)t-ratios

2.83-0.028-1.18-1.115

-2.60

4.695

8.66
0.275

Coefficientst-ratios

***

1.620

2.15

-0.017-0.70***-0.867

-2.01

***

21

**

0.536

1.32

-0.683

-2.78

***

4.363

8.76

***

0.275

Notes: ***, **, and * present significant at the 1%, 5%, and 10% levels, respectively. The estimate of the intercept term is omitted for want of space.

・**Table 4. Tobit Estimates Predicting the Target for Share Repurchases
The table provides estimates of the relation between the target for share repurchases and variables likely to affect the repurchase decision. Our dependent variables are
TAR[Number] and TAR[Yen]. These are censored variables of which the value are larger than zero if the resolution regarding the target for share repurchases is made by
the board of directors, zero otherwise. We estimate the one-tailed Tobit model truncated at 0%. We append the difference of SHARE, ⊿SHARE, to the vector of
explanatory variables.
Dependent Variable = TAR[Number]
Independent Variables

Dependent Variable = TAR[Yen]Panel (1)Panel (2)Coefficientst-ratios

Coefficientst-ratiosln(SIZE)

1.386

2.20

1.728

2.25

ROA

-0.016-0.83

M/B-0.650

-1.80

ECR

0.432

1.29

NPL

-0.576-2.89⊿SHARE-0.159

-0.95

Sigma

3.573

8.74

Pseudo-R2

0.270

**

-0.019-0.79*-0.798

-1.81

0.561

1.37

***

-0.699-2.86-0.165

-0.82

4.355

8.77

***

0.277

Notes: ***, **, and * present significant at the 1%, 5%, and 10% levels, respectively. All equations include the intercept term.

22

**
*
***
***

Table 5. Tobit Estimates Predicting the Execution of Share Repurchases
This table provides estimates of the relation between the execution of share repurchases and variables likely to affect the repurchase decision. We use 45
share-repurchasing banks, which have announced their repurchase program at the shareholder’s meeting in the fiscal year of 2002, to construct the two percentages ofshares that firms actually repurchase; EXR[Number] and EXR[Yen]. These are censored variables of which the value are larger than zero if banks actually repurchasetheir own shares, zero otherwise. There are no banks of which the execution ratio reaches 100% within one year. We, therefore, estimate the one-tailed Tobit model
truncated at 0%. As the explanatory variables affecting bank’s execution of share repurchases, we use the constant term, LCAR, ln(SIZE), M/B, ECR, and NL/L. In the no
execution group, LCAR is defined as the cumulative abnormal return from the date of the shareholder’s meeting to the date when banks actually repurchased their own
shares for the first time. On the other hand, in the no execution group, LCAR is defined as the cumulative abnormal return from the date of the shareholder’s meeting to
the date of the next shareholder’s meeting. The explanatory variables M/B, ECR, and NL/L are based on a bank’s financial statements in 2003. Therefore, allowing forthe endogeneity of the explanatory variables M/B, ECR, and NL/L, we estimate the Tobit model with endogenous variables by maximum likelihood estimation. We utilize
the constant term, LCAR, and the one-lagged and two-lagged values of ln(SIZE), M/B, ECR, NL/L, and SHARE as instrumental variables in estimating our model. Sigma
denotes the standard deviation of the disturbance in the Tobit model.

Independent Variables

Dependent Variable = TAR[Number]
Coefficientst-ratios
-3.26

***

Dependent Variable = TAR[Yen]Coefficientst-ratios-1.725

-3.51

LCAR

-1.943ln(SIZE)

14.351

1.54

11.592

1.52

M/B-2.625-0.40-1.847

-0.34

***

ECR

9.404

1.85

*

8.580

2.05

**

NPL

-8.676-2.10**-7.371

-2.17

**

Sigma

38.393

5.81***

31.468

6.61***

Pseudo-R2

0.224

0.238

Notes: ***, **, and * present significant at the 1%, 5%, and 10% levels, respectively. All equations include the intercept term.

23

Table 6. Tobit Estimates Predicting the Execution of Share Repurchases
This table provides estimates of the relation between the execution of share repurchases and variables likely to affect the repurchase decision. We use 45
share-repurchasing banks, which have announced their repurchase program at the shareholder’s meeting in the fiscal year of 2002, to construct the two percentages ofshares that firms actually repurchase; EXR[Number] and EXR[Yen]. These are censored variables of which the value are larger than zero if banks actually repurchasetheir own shares, zero otherwise. There are no banks of which the execution ratio reaches 100% within one year. We, therefore, estimate the one-tailed Tobit model
truncated at 0%. As the explanatory variables affecting bank’s execution of share repurchases, we use the constant term, LCAR, ln(SIZE), M/B, ECR, NL/L, and⊿SHARE. In the no execution group, LCAR is defined as the cumulative abnormal return from the date of the shareholder’s meeting to the date when banks actually
repurchased their own shares for the first time. On the other hand, in the no execution group, LCAR is defined as the cumulative abnormal return from the date of theshareholder’s meeting to the date of the next shareholder’s meeting. The explanatory variables M/B, ECR, NL/L, and ⊿SHARE are based on a bank’s financial
statements in 2003. Therefore, allowing for the endogeneity of the explanatory variables M/B, ECR, NL/L, and ⊿SHARE, we estimate the Tobit model with endogenous
variables by maximum likelihood estimation. We utilize the constant term, LCAR, and the one-lagged and two-lagged values of ln(SIZE), M/B, ECR, NL/L, and SHARE
as instrumental variables in estimating our model. Sigma denotes the standard deviation of the disturbance in the Tobit model.

Independent Variables

Dependent Variable = TAR[Number]
Coefficientst-ratios
-3.13

***

Dependent Variable = TAR[Yen]Coefficientst-ratios-1.788

-3.41

LCAR

-1.996ln(SIZE)

14.767

1.56

12.103

1.56

M/B-2.801-0.43-2.042

-0.38

***

ECR

9.480

1.86

*

8.682

2.08

**

NPL

-8.718-2.12**-7.414-2.20**⊿SHARE-3.051-0.26-3.508

-0.36

Sigma

38.166

6.58***

31.258

6.51

Pseudo-R2

0.225

0.239

Notes: ***, **, and * present significant at the 1%, 5%, and 10% levels, respectively. All equations include the intercept term.

24***