Japanese Corporate Finance in the Light of Recent Developments in Principal Agent Problems

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Stylized facts of corporate finance in the postwar Japan are interpreted and analyzed in a model of multi-lateral principal agent problem, wherein managers finance the project by issuing stocks as well as borrowing money from banks. We show that, in a two period model, the following features arise as the equilibrium with longterm commitments by banks and stockholders: (1) share holdings by banks to optimally choose the reward schedule for the manager, (2) delegation of minitoring as well as intervening functions against the management to the bank, and (3) dismissal of the manager as a discipline device which dominates the bankruptcy option. These features are in broad accordance with the stylized facts of the Japanese economy from 1950 through mid-1970s.