governance activity, broadly defined to include any material
change in ownership or control. There are few failures and mergers among Japanese banks
during our sample period, even after the onset of the banking crisis. Detailed examination
also reveals rigidity in ownership and control. The marked absence of external governance
activity suggests that governance of Japanese banks must be accomplished by internal
mechanisms. We presume that bank performance is a reliable proxy for executive
effectiveness and interpret executive turnover following poor stock returns or profitability
and as evidence of active internal governance.We do not detect a relation between turnover
and stock returns, profitability, or asset growth in the pre-crisis years of 1985–1990,
however. This finding could reflect that absolute bank performance, especially when
measured by stock prices, was high during the pre-crisis period, and that relative performance
did not factor into evaluations of top executives. Perhaps bank managers were
evaluated on other criteria during this period, such as non-public performance measures or
the collective performance of firms in the banks’ client networks. A less benign interpretation
is that Japanese bank managers did not face performance incentives in the late
1980s when lending decisions exposed banks to risks that subsequently became manifest in
the collapse of asset prices, the recessions, and the bad loan problems of the 1990s.
Incentives for Japanese bank executives appear to sharpen during the crisis period of
1991–1996. Specifically, we find an inverse relation between bank performance and nonroutine
presidential turnover, i.e., when a president is replaced yet does not succeed to the
chairmanship. For instance, the observed frequency of non-routine presidential turnover
for a bank in the worst quintile of market-adjusted stock return is 7.0%, versus 1.6% for a
bank in the best performance quintile. Similarly, the frequency of non-routine turnover for
a bank in the worst quintile of industry-benchmarked profitability is 15.1% versus about
2.5% for other banks. Performance–turnover relations of this magnitude are commonly
interpreted as economically significant and are comparable to those observed at U.S. banks
and Japanese industrial firms (Barro and Barro, 1990; Kaplan, 1994; Kang and Shivdasani,
1995). In short, our results suggests that Japanese bank executives faced consequences for
poor performance in the 1990s, a period otherwise characterized by inactive external
governance and regulatory forbearance.
Our investigation contributes to our knowledge of corporate governance in several
ways. First, relative to our understanding of corporate governance of Japanese industrial
328 C.W. Anderson, T.L. Campbell II / Journal of Corporate
Finance 10 (2004) 327–354
firms we know very little about the governance of Japanese financial institutions,
particularly with respect to the banking crisis of the 1990s. For example, several studies
address whether Japanese banks face so-called ‘‘market discipline’’ and establish that
bank performance and risk are reflected in stock prices even when financial statements
are opaque and regulators follow policies that prop up poorly performing banks (Genay,
1998; Brewer et al., 1999; Yamori, 1999; Bremer and Pettway, 2002). Our study is
important because it suggests that intern
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