Discussion Papers In Economics
And Business

The Relationship between Managerial Compensation andBusiness Performance in Japan:
New Evidence using Micro Data
Hideaki Sakawa and Naoki Watanabel

Discussion Paper 06-29

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANThe Relationship between Managerial Compensation andBusiness Performance in Japan:
New Evidence using Micro Data
Hideaki Sakawa and Naoki Watanabel

Discussion Paper 06-29

November 2006
この研究は「大学院経済学研究科・経済学部記念事業」
基金より援助を受けた、記して感謝する。
Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANThe Relationship between Managerial Compensation andBusiness Performance in Japan:
New Evidence using Micro Data*

Hideaki Sakawa and Naoki Watanabel†

Abstract
This paper examines the relationship between the level of Japanese business managers'
compensation and the quality of corporate governance, and whether weaker governancestructures lead to poorer future performance. The conclusions of this paper are as follows.
First, the level of Japanese business managers' compensation increases as the percentage of'old', 'bank' and 'gray' outside directors increases. Compensation also increases with board
stockholding and block holding. This suggests weak monitoring by old, bank and gray outside
directors and block holders. Second, our results show that firms with weaker governancestructures have poorer performance. These results suggest the existence of an
overcompensation problem with Japanese managers similarly to the US.
JEL classifications: G30; G32; J33; L22
Keywords: Board of Directors, Corporate Governance, Managers' Compensation, Ownership
Structure.

* The authors are grateful to Yoshiro Tsutsui, Akira Kohsaka, Shinsuke Ikeda, Hideaki Kiyoshi Kato andRalf Bebenroth for their valuable comments. A Japanese language version of this paper was presented at the
Spring Meeting of the Japan Society of Monetary Economics at Waseda University on 29 April 2006 andthe authors gratefully acknowledge Katsuyuki Kubo for his helpful remarks as discussant.
†Sakawa (correspondence author): Graduate School of Economics, Osaka University, 1-7 Machikaneyama,
Toyonaka, Osaka 560-0043, Japan. Email: dg068sh@srv.econ.osaka-u.ac.jp. Watanabel: Osaka School ofInternational Public Policy, 1-31 Machikaneyama, Toyonaka, Osaka 560-0043, Japan. Email:n-watanabe@osipp.osaka-u.ac.jp.

Ⅰ. Introduction
In Japan, firms are regarded as being managed by all of the board members. Under
Japanese commercial law all board members, including inside directors, havemanagement responsibility. The Tokyo Stock Exchange (2004), for instance, states thefollowing: The term "management" means the persons recognized by the company tohave actually been involved in the management of the company, including
representative directors and executive officers, which in turn include representative
executives and executives. (p.12). On the other hand, in the US the role of board
members is merely to elect and monitor the chief executive officer (CEO) who, in turn,has responsibility for day-to-day management. This is the main difference between
Japanese and US commercial law. However, past empirical studies do not confirm
whether the corporate governance of Japanese firms' management style is weak. The
objective of this paper is to examine whether there is a relation between the level ofbusiness managers' compensation and the quality of corporate governance, and whether
firms with weaker governance structures have poorer future performance.
Theoretical studies by Holmstrom (1979; 1982) analyze the managementcompensation problem using a principal–agent model. They show that the compensationof agents (managers) becomes pay-for-performance so as to maximize value forshareholders (principals) when ex post business performance represents the manager's
level of effort. Ozerturk (2005) presents a theoretical model concerning the degree ofmanager (CEO) independence. His model proves that the board of directors will
monitor the CEO less when it is less independent of the CEO.
Previous empirical papers in the US examine the relation between the level ofcompensation for boards of directors and firms' performances. Sloan (1993) concludes
that CEO cash compensation is positively related to business profit. Joskow and Rose
(1994) show that CEO compensation is related both to firms' profits and stock returns.
Their paper reports that CEO compensation increases by 6.8% as business profit
increases by 10%, and by 0.8% as stock returns increase by 10%.
There are several studies that examine the relation between the level of CEO
compensation and the quality of corporate governance. Yermack (1996) provides
evidence that business value and performance is a decreasing function of board size,
suggesting that the board of directors monitors the CEO less as the number of directors
on the board increases. Core et al. (1999) point out the possibility that the board of
directors tends to be dependent on the CEO when the CEO influences the board of1

directors. They indicate the possibility that monitoring proxies, such as the board of
directors' characteristics and ownership structure, are significantly related to CEO
compensation. They also prove that CEO compensation increases as the result of
insufficient monitoring of the board of directors and ownership structure. In addition,
their paper shows that firms with weaker governance structures often have poorer future
performance.
A number of past empirical papers also compare US and Japanese CEOs in termsof compensation for performance. Kato and Rockel (1992), for example, regress CEO
compensation against stock returns, the return on equity (ROE), and CEO
characteristics. They find that Japanese CEOs' compensation is positively related tobusiness size but is not significantly related to either ROE or CEO characteristics.
Kaplan (1994) regresses Japanese CEO compensation against stock returns, the growthrate of sales, return on assets (ROA), and a loss dummy variable using Japanese CEO
compensation data from 1980 to 1988. He finds that the loss dummy variable issignificantly related to CEO compensation. Finally, Kato (1997) examines therelationship between six main bank keiretsu dummy variables and CEO compensationin Japan. As with previous work, Kato (1997) confirms that CEO compensation ispositively related to business performance. However, these studies generally examine
the relationship between the level of CEO compensation and each firm's profits.
Accordingly, there is no consideration given to the relationship between the level ofmanagers' compensation and the quality of corporate governance, and whether firms
with weaker governance structures have poorer future performance.
The conclusion of this paper is that Japanese managers are overcompensatedbecause they are weakly monitored. We find that Japanese managerial compensation
increases as the percentage of old, bank and gray outside directors increases. We alsofind that Japanese managers' compensation is higher in firms with block holders. These
relationships suggest that monitoring of the role of old, bank, and gray outside directors
is weak, as is monitoring of board stockholding and block holders. In order to examine
whether firms with weaker governance structures have poorer future performance, we
regress the predicted component of compensation arising from the quality of firms'
corporate governance, such as the board and ownership structure variables, against
future business performance. The results show that the predicted component ofcompensation is negatively related to future business performance, and that Japanesemanagers have an overcompensation problem as in the US.
The remainder of this paper is organized into five sections. In Section II weestimate the managers' compensation equation and make two hypotheses concerning

2

Japanese managers' compensation. In Section III the sample is described and thevariables are defined. Section IV describes and interprets the empirical results. A
summary and conclusion is provided in Section V.

Ⅱ. Empirical Model
Previous studies of Japanese CEOs' compensation assume that principals areoutside shareholders and the agent (or manager) is the CEO. Japanese commercial law
determines that all of board members, excluding outside directors and auditors, havesome responsibility for management. This paper assumes that principals are outside
shareholders, and agents (or managers) comprise all board members, excluding outside
directors and auditors. We then examine whether outside directors sufficiently monitor
managers.
In Section II.1, we present the methodology to test whether there is a relationshipbetween the level of managers' compensation and the quality of corporate governance.
Variables are defined in Section II.2. In Section II.3, we test whether firms with weaker
governance structures have poorer future performance.

II.1 The determinants of managers' compensation
This paper examines whether there is a relation between the level of a Japanesebusiness manager's compensation and the quality of the firm's corporate governance as
in Core et al. (1999)1.
We regress Japanese business managers' compensation against monitoring proxyvariables that represent board of director characteristics and ownership structure after
controlling for variables that represent business performance. The Japanese business
managers' compensation regression is represented in equation (1).
compensation it = ∑ β j ( performanc e it ) + ∑ δ k (board characteri stics it )jk+ ∑ η l (stock ownershipit ) + c i + d t + ε it

(1)2

l

1 Previous studies of Japanese CEO compensation such as Kaplan (1994) and Kato (1997) examine

whether CEO compensation is positively related to business profit, but do not investigate whether or
not CEO compensation is well monitored.

3ci = industry effect (dummy variables), d t = time effect
When we relate compensation to corporate governance, the null hypothesis meansthat the estimated coefficients of monitoring proxy variables are equal to zero( δ k = ηl = 0 ). Accordingly, we can check the significance of the null hypothesis using
the following F-test.
H 1N : δ k = η l = 0 ( ∀ k, l) vs. H1A : otherwise

II.2 The managers' compensation estimation
We analyze the effectiveness of board and shareholders' monitoring of managers'
compensation. Compensation is determined by each firm's performance and monitoring
proxy variables when the null hypothesis ( H 1N : δ k = η l = 0 ( ∀ k, l) ) is rejected. The
definitions of all independent variables are provided in Table 1.
We employ four economic variables as determinants. Positive signs arehypothesized for the two business performance proxy variables: the growth rate of sales
and ROA. Xu (1997) argues that a profit and/or loss statement is necessary when salaryis paid. Therefore, we adopt the loss/profit dummy variable to check whether salary is
reduced when a loss is reported. Managerial compensation in a larger firm is thought tobe higher. This is because larger business size needs higher management abilities. As aresult, managers' compensation is used to control for the effect of business size, and thesign condition of business size is positive.
We also include six types of board characteristics: the percentage of busy outside
directors, gray outside directors, old outside directors, bank directors, government
directors and corporate directors. Table 1 presents the definition of the six variables.
Each of the variables representing the lack of outside directors' independence toward
managers has a positive relation with managerial compensation.
There is mixed evidence about the sign condition of busy outside directors. Core etal. (1999) point out the possibility that their monitoring role is weak. On the other hand,busy outside directors improve their monitoring ability by holding the additional posts
as other firms' directors. As a result, the sign condition of the percentage of busy outside
directors cannot be determined. Core et al. (1999) suggest that the monitoring of grayand old outside directors is also weak: the sign condition of their monitoring is positive.
2 Table 1 presents the definitions of all variables that represent performance, board characteristics,

and stock ownership.
4

There is mixed evidence about the sign condition of the percentage of bankdirectors. In Japan, it has been argued that commercial banks monitor the managementof firms, and so bank directors play a role in monitoring firms. If this is the case, thenmanagers' compensation may be reduced by bank directors. On the other hand, Morckand Nakamura (1999) point out that the restructuring of firms does not progress after
directors from the banking sector have joined the firm. Therefore, we cannot decide thesign condition.
There is mixed evidence about the sign condition of government directors. In thefirst instance, they are thought to play the role of an outside director as in Aoki et al.
(1994). If this is the case, then sign condition is negative. On the other hand, Kaplan and
Minton (1994) insist that government directors do not play the role of an outside
director. In other words, they assume that the monitoring of government directors is
weak because retired government officials tend to be firms' directors3. According to theassumptions of Kaplan and Minton (1994), government directors take a similar role tothat of gray outside directors, and the sign condition is positive. Accordingly, we cannot
decide the sign condition. Corporate directors are appointed by firms that hold morethan 20% of stocks and are the largest stockholders. These also play a monitoring role.
Therefore, the sign condition is negative.
We adopt two stock ownership variables: percentage of board stock ownership andblock holder dummy variable. The sign condition of board stock ownership is defined as
positive because the proportion of voting rights the board represents in a stockholders'meeting is higher when stock ownership is higher. The sign condition of the blockholder dummy variable is negative as in Core et al. (1999). They point out that the roleof block holders' monitoring is effective. Accordingly, the sign condition is negative.

II.3 The excess compensation hypothesis
We find that monitoring proxies are significantly related to managers' compensation
when the null hypothesis (H1N) is rejected. There are two possibilities if the null
hypothesis is rejected. One possibility is that managers' compensation is well monitored.
The terms of the monitoring proxies are positively related to future businessperformance when Japanese managers' compensation is well monitored. In other words,
there is no excess compensation. We call this hypothesis the efficient compensation
hypothesis.
The other possibility is that managers' compensation is weakly monitored. The
3 This is known as a 'descent from heaven'.

5

terms of the monitoring proxies are negatively related to future business performance
when Japanese managers' compensation is weakly monitored. In other words, the terms
indicate excess compensation. We call this hypothesis the excess compensation
hypothesis.
In order to identify these two possibilities, future business performance isregressed against the terms representing the monitoring proxies (predicted excesscompensation). The interpretation of the excess compensation hypothesis is that thepredicted excess compensation (PEC) corresponds to managers' overcompensation
when PEC is negatively related to future business performance. PEC arises from thequality of firms' corporate governance such as the board and ownership structure
variables. As in Core et al. (1999), we define the monitoring proxy terms^^( ∑ δ k (board characteri stics it ) + ∑ η l (stock ownership it ) ) as PEC.
l

k

^

^

PEC it = ∑ δ k (board characteri stics it ) + ∑ η l (stock ownership it )
k

(2)

l
^

where the coefficients on the governance variables ( ∑ δ k (board characteri stics it ) +k^∑ η l (stock ownership it ) ) are estimated with estimation (1).
l

To identify whether PEC ( PECit ) is positively or negatively related to futurebusiness performance, we regress future business performance ( ROAi ,t + h ) on PEC( PECit ). Using a single control variable to represent business performance, we estimate
the following equation.
ROAi ,t +h = ζ 1 PEC it + ζ 2 sale it + c i + d t + ε it(3)

ci = industry effect (dummy variables), d t = time effect
H 3N : ξ1 ≥ 0 vs. H 3A : ξ1 < 0
We test the sign condition of equation (3) PEC ( ξ1 ) to examine whether thepredicted efficient compensation hypothesis is accepted or rejected. The null hypothesis
represents a positive sign condition ( H 3N : ξ1 ≥ 0 ), and the alternative hypothesis
represents a negative sign condition ( H 3A : ξ1 < 0 ). The dependent variable is a profit

6

index of both ROA in the next fiscal year and the average ROA for the next five fiscal
years.
The sign condition of PEC ( ξ1 ) is negative when managers are weakly monitored.
Then, future ROA goes down when PEC goes up, and there are excess components inmanagers' compensation. Core et al. (1999) report that the sign condition of PEC ( ξ1 ) is
negative, and conclude that US CEO compensation includes excess components.

III. Data
We use data from the Nikkei NEEDS database along with hand-collected data. The
Nikkei NEEDS data is from company annual reports, which contain a panel of cash
compensation data in the financial statements and list of stock holders. Data on theboard of director characteristics are collected from Yakuin Shiki Ho. Yakuin Shiki Hodefines 'outside' directors as those directors who have become directors in the last four
years, and 'busy' outside directors as those who serve on two or more other boards.
We remove firms if there is any missing compensation data, no data in Yakuin Shiki
Ho, and no change of their account day. The final sample consists of 2,610 observations
over a five-year period (from 1991 to 1995) for 522 Japanese manufacturing firms
publicly traded on the Tokyo Stock Exchange. The firms are divided into fifteen
manufacturing industry groups4.
We specify each manager's cash compensation as the sum of salary and bonus
earned per director. There is no publicly available data on CEO and individualcompensation in Japan. Only total compensation data, including all directors and all
auditors, is available in the Nikkei NEEDS database.
We obtain the survey data of compensation characteristics for the board of
directors from Yakuin no Hoshu, Shoyo, Nenshuu. These survey data are collected from
86 firms publicly traded on the Tokyo Stock Exchange. The compensation datacollected cover the CEO (or president), Senmu (senior managing director), Joumu(managing director), Torisimariyaku (junior directors), and the full-time and part-time
auditors.
We can calculate the average compensation of all board members, excluding
outside junior directors, full-time auditors and part-time auditors, with the data from
Yakuin Shiki Ho and Yakuin no Hoshu, Shoyo, Nenshuu. The average compensation of
all board members excluding outside directors and auditors is used as the manager's
4 Japan’s Standard Industrial Classification divides manufacturing industry firms into 24 groups.

7

compensation proxy variables. The manner of calculating the average manager's
compensation is explained in the Appendix.
Descriptive statistics of the variables in equation (1) are provided in Table 2. As
compared with the data in Core et al. (1999), the level of ROA and the growth rate ofsales are lower because of the bursting of the bubble economy in 1990. Our sample
contains many firms whose statements of accounts indicate losses, with 11.7% of firms
earning negative profits. The average size of assets is about 200 billion yen. The numberof directors in our sample is about 12, and this is larger than in Core et al. (1999). The
average percentage of board members' stock ownership is 2.2%, and lower than that inCore et al. (1999). The average percentage of bank stock ownership is 41%, and offirms' stock ownership is 26%. Table 3 represents the descriptive statistics of thevariables in equation (3). The level of average ROA after one fiscal year and for fivefiscal years is low.

IV. Results
In this section, we estimate two equations and test two hypotheses. First, in Section
IV.1 we estimate equation (1), and test whether there is a relation between the level ofJapanese business manager's compensation and the quality of corporate governance.
Second, in Section IV.2 equation (3) is estimated, and tests whether the excesscompensation hypothesis is accepted or rejected.

IV.1 The managers' compensation estimation
Table 4 reports the results of estimation of equation (1). As for board
characteristics, estimated equation (i) includes five types of variables excluding thepercentage of gray outside directors, and (ii) includes six types of variables including
the percentage of gray outside directors.
We test the null hypothesis (H1N) using estimated equation (1) (i) and (ii). The null
hypothesis is rejected with the governance test, and the result is common to both (i) and(ii). Therefore, we find that managers' compensation is significantly related to thequality of a firm's corporate governance.
Table 4 demonstrates that the level of managers' compensation is related tobusiness performance. As for economic determinants, the estimated coefficients of thegrowth rate of sales, ROA, and size of assets are consistent with their sign conditions,8and are positively significant at the 1% level. Similarly, the estimated coefficient of theloss dummy variable is consistent with the sign condition, and is negatively significant
at the 1% level5.
The estimated equations (i) and (ii) of board characteristics are interpreted asfollows. The estimated coefficient of the percentage of busy outside directors is notconsistent with the sign condition, but is not significantly negative. This result isdifferent from Core et al. (1999), and we can interpret this as busy outside directors
developing their monitoring ability while they hold the additional posts as other firms'
directors. The estimated coefficient of the percentage of old and gray outside directors is
consistent, but not significantly positive. This result is consistent with Core et al. (1999),and supports the notion that their monitoring role is weak. The estimated coefficient of
the percentage of bank directors is not significant, but positive. This result also supports
assessment of their monitoring role as weak. The estimated coefficient of the percentage
of government directors is not significant, but negative. The estimated coefficient of thepercentage of corporate directors is consistent with the sign condition. As for theestimated equation (i), the estimated coefficient is not significant. It is, however,significant at the 10% level in equation (ii). This implies that corporate directors
monitor their parent company, and that managers' compensation falls with theirmonitoring.
As for stock ownership, the percentage of stock ownership per board member andblock holder dummy is positive at the 1% level. The estimated coefficient of percentage
stock ownership per board member satisfies the sign condition. This is a different result
to that of Core et al. (1999)6.

IV.2 Predicted excess compensation hypothesis
In this section, we examine whether the terms of monitoring proxies are positively
related to future business performance or negatively related. We can deduce thatmanagers receive overcompensation when the terms of monitoring proxies are5

We find that managers' compensation goes up by about 17 thousand yen as the growth rate of sales
increases by 1%, and compensation goes up by about 300 thousand yen as ROA increases by 1%.
We also find that managers' compensation goes down by about 1.3 million yen when the previous
year's statement of accounts reports a negative profit.

6

In both (i) and (ii), managers' compensation increases by about 140 thousand yen as the percentage
of stock ownership per board member increases by 1% or when ROA increases by 0.5%. Managerial
compensation in companies where block holders exist is about 900 thousand yen lower than in thosecompanies where block holders do not exist.
9negatively related to future business performance.
Table 5 presents the results of equation (3). Equation (3), (i) and (ii), shows that thecoefficient of PEC ( ξ1 ) is negative both for next year's ROA and the average ROA for
the next five years, but these values are not significant. The result shows that thenegative sign of the PEC coefficient is robust, and the effect of PEC in reducing
business profits persists for long periods. The effect of PEC decreases and this isconsistent with Core et al. (1999). We find that ROA decreases by about 0.1% as PEC
increases by one unit year7, and, from(3) (i), that a cumulative loss in ROA decreases by–0.09% over one year and by –0.3% over five years, and from (3) (ii) that it decreases
by –0.012% over one year and by –0.45% over five years. This effect is smaller thanthat found in Core et al. (1999). Compared with US managers' overcompensation,
managers' compensation in Japan is relatively smaller.
Overall, the effect of PEC implies negative business performance. These results
show that there is a manager overcompensation problem in Japan as in the US, but it isrelatively smaller in the case of the former.

V.

Conclusion

This paper examines whether managers' compensation is efficiently determined or
overcompensated because of weak monitoring. As a result, there are three findings
about Japanese managers' compensation. First, Japanese managers' compensation isrelated to the corporate governance of firms. Second, the monitoring role of old, bank,and gray outside directors is weak. The role of board members and block holders as
stock holders is also weak. Third, the effect of PEC is negative to firms' performance,
but the efficient compensation hypothesis is not significantly rejected. That is to say,there is a managers' overcompensation problem as in the US. In addition, we also findthat the effect of PEC in decreasing firms' profits persists for five years.
The result of this paper implies that firms in Japan can get more profit bydecreasing managers' overcompensation. In other words, Japanese firms can make more
profit by decreasing the number of outside directors such as the old, the gray, and thosefrom the banking sector.

7

The coefficient implies a per-year loss in ROA of 0.09%, 0.06%, 0.12%, and 0.09%, over one yearby (3) (i), five years by (3) (i), one year by (3) (ii), and five years by (3) (ii).
10Appendix
This appendix discusses the way in which the average compensation of all board
members excluding outside directors and auditors is used as managers' compensation
proxy variables. We divide all 86 firms in the sample into three groups to control for thesize effect of board members' total compensation. These groups comprise small (28firms), medium (29 firms), and large (29 firms) compensation groups. The datacomprise compensation for CEOs (or presidents), Senmu (senior managing directors),
Joumu (managing directors), Torisimariyaku (junior directors), full-time auditors andpart-time auditors.
Example1: An example of average compensation data in Yakuin no Hoshu, Shoyo,
Nenshuu
CEO
A

Senmu Joumu
B

Torisimariyaku
from inside

Torisimariyaku
from outside

full-time
auditors

part-time
auditors

D

E

F

G

C

Characteristics data of the boards of directors are composed of the number of CEOs,
Senmu, Joumu, Torisimariyaku from inside, Torisimariyaku from outside, full-time
auditors, and part-time auditors. The number in each firm is as follows.
Example2: An example of number data in Yakuin Shiki HoCEOSenmu Joumuab

Torisimariyaku
from insidec

Torisimariyaku
from outsidedEfull-time
auditors

part-time
auditorsfg

We calculate the average compensation of all board members excluding outside
directors and auditors as follows. First, we calculate the average compensation of
Torisimariyaku from outside (e * E), full-time auditors (f * F), and part-time auditors(g * G) in each of the three groups. Second, we calculate the total average compensationof Torisimariyaku from outside, full-time auditors, and part-time auditors(e * E + f * F + g * G) in each of the three groups. Third, we calculate the total averagecompensation of all board members excluding Torisimariyaku from outside, full-time
auditors, and part-time auditors as follows.
Manager' s Compensati on =(Total compensation − (e * E + f * F + g * G))
number of managers

11References
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12

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13

Table 1 Definitions of variables
Variable

Definition

Dependent Variables
Compensation per manager(Ten Thousands of Yen)
Performance(Economic Determinants)
The growth rate of sales (%)
Return on assets (ROA) (%)
Loss/profit dummylog (Size of assets)
Board Characteristics
Busy outside directors(% of outside directors)
Old outside directors(% of outside directors)
Gray outside directors(% of outside directors)
Bank directors(% of outside directors)
Government directors(% of outside directors)
Corporate directors(% of outside directors)
Stock Ownership
Board stock ownership (%)
Block holder dummy

Average estimated compensation of all board
members, excluding outside directors and auditors

Previous year's growth rate of sale
ROA divided by the profit of the previous year
The dummy variable for negative pretax income
Log-transfer size of asset
The percentage of outside directors who serve on two
or more other corporate boards
The percentage of outside directors who are 65 yearsof age or older
The percentage of the outside directors who are lessindependent
The percentage of outside directors who are fromcommercial banks
The percentage of directors who are appointed by thegovernment
The percentage of outside directors who are fromfirms holding more than 20% of stocks and that are
the largest stockholders
The percentage of shareholdings owned by the board
The existence of an external party that owns at least
10% of outstanding shares.

14

Table 2 Descriptive statistics
Variable

MeanMedianStd. Dev

1435.588

1337.007

621.113

1.483
1.600
0.117
19.821

0.288
1.580
0.000
8.048

19.3752.886
0.322
39.05031.39512.55332.32421.0754.374
14.844

0.000
0.000
0.000
0.000
0.000
0.000

37.94526.73738.56132.04216.80531.562

2.142
0.364

0.398
0.000

4.114
0.481

Mean

MedianStd. Dev

ROA over one year (％）
1.193
Average ROA over five years 1.128(％）
Independent Variables
PEC by Eq(1) (i) (Millions Yen)
0.520
PEC by Eq(1) (ii) (Millions Yen)
0.639
Sales (Tens of Billions of Yen)
18.309

1.284
1.171

3.037
2.404

0.340
0.456
7.138

0.668
0.679
39.141

Dependent Variables
Compensation per manager
Performance
The growth rate of sales
Return on assets (ROA)
Loss/profit dummySize of assets
Board Characteristics
Busy outside directors
Old outside directors
Gray outside directors
Bank directors
Government directors
Corporate directors
Stock Ownership
Board stock ownership
Block holder dummy

Table 3 Descriptive statistics (2)Variable
Dependent Variables

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Table 4 Estimated coefficients for equation (1)Independent Variables

Predicted
Sign

Regression(i)Regression(ii)Growth rate of sales+

Return on assets (ROA)+

Loss/profit dummy–log (Size of assets)+

1.697 ***
(0.006)29.761 ***(0.000)–128.048***(0.005)106.805***(0.000)1.686 ***
(0.007)29.950 ***(0.000)–127.271 ***(0.005)108.488 ***(0.000)Board Characteristics
Busy outside directors+

Old outside directors+–0.170(0.605)0.651(0.143)Gray outside directors+

Bank directors?

Government directors?

Corporate directors

–

0.185
(0.618)–1.027(0.139)–0.826 *(0.075)–0.257(0.457)0.635(0.154)0.288(0.411)0.286(0.464)–0.911(0.198)–0.700(0.152)

Stock Ownership
Board stock ownership+

Block holder dummy–

13.943 ***(0.000)88.519 ***(0.004)13.855 ***(0.000)91.520 ***(0.003)0.88270.8827***634.52 ***4.25 ***
4.31 ***

Performance

Adjusted R-squared
F-statistic
Pooled test (F-statistic)
Governance test (F-statistic)

655.734.21 ***
4.83 ***

Note. P-values are in parentheses. Superscripts *, **, and *** denote significance at the
10%, 5%, and 1% levels, respectively. The null hypothesis of the pooled test is that all16

of industrial dummy variables equal zero.

Table 5 Estimated coefficients for equation (3)Independent Variables(i) 1 year(i) 5 years(ii) 1 year(ii) 5 years

PEC

–0.09
(0.295)–0.06(0.387)–0.12(0.166)–0.09(0.183)Size of sales–0.0002(0.893)0.168
26.08 ***
6.91 ***

0.0004(0.777)0.213
34.71 ***
8.34 ***–0.0003(0.832)0.168
26.13 ***
6.92 ***

0.0002(0.854)0.213734.77 ***
8.36 ***

Adjusted R-squared
F-statistic
Pooled test (F value)

Note. P-values are in parentheses. Superscripts *, **, and *** denote significance at the
10%, 5%, and 1% levels, respectively. The null hypothesis of the pooled test is that allindustrial dummy variables equal zero.

17