Self-Fulfilling Distortion and Ownership Structure: At the Dawn of the Japanese Capitalism

Does the ownership structure affect firms' performance? We first theoretically show that in an inefficient market, investors motivate managers to pursue a higher return on equity, the short-term performance indicator instead of a higher return on asset, the long-term indicator and encourage managers to distort the financial leverage. This self-fulfilling distortion implies that, in an inefficient market, a higher concentration of ownership improves long-term performance by containing the distortion. To test the prediction, we build a new dataset of Japanese firms from 1878 to 1910. Then, we show that the Japanese market then was inefficient, that the bond flotation was distorted among low and mediocre performing firms, and that a higher concentration of ownership at the president improved the return on asset. These results are consistent with the tendency in contemporary non-US advanced economies. A higher concentration of ownership offsets the adverse effects of a less efficient capital market.