Determining the existence of Amakudari in publicly-traded Japanese companies: a Poisson regression approach

Transcription

1 Applied Economics Letters, 28, 15, Determining the existence of Amakudari in publicly-traded Japanese companies: a Poisson regression approach Sang-Young Rhyu Graduate School of International Studies, Yonsei University, 134, Sinchon-dong, Seodaemun-gu, Seoul , South Korea syrhyu@yonsei.ac.kr Amakudari is a political-economic phenomenon frequently observed in the Japanese economy and other modern societies. Retired high-ranking bureaucrats are appointed as top executives in lucrative private firms that are controlled by the government ministry or main banks that Amakudari once regulated. These high-ranking ex-government officials use their influence for favourable legislation and treatment to help their companies. Due to the fact that Japanese publicly traded companies hire mostly a smaller portion of directors through Amakudari and sometimes none of them are hired, the most commonly used classical linear regression framework cannot be applied due to violating an assumption on the continuous dependent variable. Instead, this study adopts a countingprocess regression approach in order to explain the existence of Amakudari using 23 data of all publicly traded companies in Japan. I. Introduction In many Asian countries, particularly Japan, retired high ranking officials and board members from governments and main-banks often take well-paying jobs in large private corporations. In exchange for these new positions, the new executives, called Amakudari, intend to push for favourable regulations and treatments to enhance the profits of their new corporation by using their previous job experiences and connections in government and public sectors. 1 Amakudari is important to understand as an aspect of political economy in Asian countries. Thus, this study attempts to explain the existence of Amakudari using Japanese publicly traded companies from 23 data. The existing literature has focused on the impact of Amakudari on business performance when companies hire ex-government officials. 2 That is, the literature recognizes the economic usefulness of Amakudari to achieve private companies goals. Further, we ask which companies may hire retired government-related employees and how many of them onto the board of directors. The study explores how many Amakudari are 1 The Japanese meaning of Amakudari is descent from heaven, which is known as the revolving door in the US. Colignon and Usui (23) define Amakudari in a narrow sense as elite bureaucrats in the heavenly world moving down to the earthy private corporations upon retirements to take the lucrative boards of director positions. (p. 2) In moving to their new positions, the former bureaucrats take with them invaluable insider knowledge about a ministry s policies and procedures, as well as the contracts and personal relationships developed during their careers (p. 3). 2 See Schaede (1995), Calder (1998, 1999), Suzuki (21), Horiuchi and Shimizu (21) and Asano and Eto (23). Applied Economics Letters ISSN print/issn online ß 28 Taylor & Francis DOI: 1.18/

2 198 S.-Y. Rhyu hired by identifying unique features of each publicly traded company. About 2513 Japanese companies listed in Japanese stock market hire up to 61 directors, while Japanese publicly traded companies hire 14 directors, on average. The number of Amakudari takes only nonnegative integers with a maximum of nine directors, thus this analysis violates the assumptions imposed by the classical linear regression framework. That is, this count variable requires a special treatment since the distribution can be very different from normal distribution. 3 Thus, the study adopts a suitable model of the Poisson regression model with quasimaximum likelihood estimation. A further explanation of the Poisson model is addressed in Section III. The article progresses as follows: Section II provides an empirical overview of Amakudari in Japanese companies. Section III offers a background on the Poisson regression model. Section IV discusses the empirical findings of determining why and how many Amakudari are hired in Japanese publicly traded companies. Section V concludes with remarks on our future work Directors Mean Median 13. Maximum 61. Minimum 4. SD NARROWER_AMAKUDARI Mean.14 Median. Maximum 7. Minimum. SD.49 II. Amakudari in Japanese Publicly Traded Companies Using the recent year data on Japanese publicly traded companies (Nikkei: Annual Corporation Reports 24), the study overviews the status of Amakudari and its three subgroups, which are compared with the overall board members in the companies. In this section, I attempt to identify stylized features on Japanese Amakudari. Figure 1 shows a frequency table indicating, on average, as the number of overall directors of Japanese listed companies. This study classifies Amakudari into three subgroups by career paths, such as originated from the government bureaucracy, from the quasi-government sector and from the financial sectors. This article defines a narrower sense of Amakudari as including only directors originating from both government and quasi-government sectors. In contrast, the study defines a broader sense of Amakudari with inclusion of three subgroups BROADER_AMAKUDARI Mean.75 Median. Maximum 9. Minimum. SD Fig. 1. The number of board members vs. the number of Amakudari 3 A count variable takes on nonnegative integer values, and its examples include the number of children born to a woman, the number of times someone is arrested in a year, or the number of patents applied for by a firm in a year. See more on Wooldridge (26, pp. 64 5). 4 The narrower definition of Amakudari is commonly used in the existing literature (Nakano, 1998; Colignon and Usui, 23). We prefer using a broader concept of Amakudari because the appointment of directors in Japanese companies has not been determined mainly by the host companies initiatives based on purely economic and managerial factors. Due to rigid crossshare holding relations and socio-cultural transactions between main banks and firms, many directors tend to be dispatched by the main banks and not recruited by the host firms. Therefore, the patterns of Amakudari from the three different subgroups display more similarities than differences.

3 Determining the existence of Amakudari in publicly-traded Japanese companies 199 Table 1. The cross-frequency tables among subgroups of Amakudari Amakudari_Financial Total Narrower definition of Amakudari Total Note: The null hypothesis of the independence in the contingency table is rejected, based on the Pearson Chi-square test statistic ( with p-value of.) and the likelihood ratio test statistic (86.37 with p-value of.1). The broadly defined Amakudari hire, on average,.75 directors with a maximum of 9 for these companies, which gives a quantitative indication as to the influence of Amakudari in company board rooms and in a director s position. Thus, if an Amakudari is hired, they would be a director in order to exert the most possible influence. Furthermore, Table 1 provides the crossfrequency table between the narrowly defined Amakudari and those originating from financial sectors. This cross-frequency table explains where the most valuable Amakudari originate. The figures in columns provide frequencies of Amakudari from the financial sector. Out of 2513 publicly traded companies, 1635 of them did not have any Amakudari from the financial sector, which is expected. But, 455 companies hired one Amakudari from the financial sector, 265 have two hires, and 167 companies have more than three directors from the financial sectors (with the maximum hires at seven). These summaries indicate that a smaller frequency of companies hires Amakudari, but if they do they more than likely hire more than one. The government sectors are believed to have the greatest incidence of Amakudari in companies, leading it to be the most widely studied sector of the three in the literature. In addition, the least overall frequency of Amakudari comes from the quasigovernment sector. Table 1 indicates that 2271 companies did not appoint Amakudari from government bureaucracy or from quasi-government sectors. 18 companies had one Amakudari from the narrowly defined Amakudari, and 62 companies had more than two directors (while the maximum hire from both sectors is five). The overall number of Amakudari from the narrow definition of Amakudari is quite a bit less compared to the financial sector, but the same pattern of a few companies hiring multiple Amakudari is evident. Table 1 provides important information on the systematic hiring from the same subgroup of Amakudari. That is, the null hypothesis of the independence in the contingency table is rejected. The two test statistics are employed with indications of rejecting the null hypothesis of the independence; the Pearson Chi-square test statistic is , indicating p-value of. and the likelihood ratio test statistic is with p-value of.1. The discussions in both Table 1 and Fig. 2 allow us to characterize the following stylized facts: (i) More Amakudari are hired from the financial sector than from the government sector (bureaucracy) or quasi-government sectors. (ii) When Amakudari are hired from the narrower sense of government, more Amakudari are employed from the bureaucracy compared to quasi government. (iii) When Amakudari are hired from one of three subgroups, subsequent hiring will be made from the same sector. That is, Amakudari are not mixed across different subgroups. For example, although a company hires four directors from the government sector, it did not hire any from the financial sector or from the quasi-government sector. In contrast, 48 companies each hire from both the financial and bureaucracy sectors. 5 5 Since Table 1 was made of two-dimensional tables, it is hard to make a three-dimension discussion based on these three subgroups. For example, it is hard to count the number of Amakudari within each company that come from government sectors, from financial sectors or from quasi-government sectors.

4 11 S.-Y. Rhyu Fig. 2. Amakudari_Bureaucracy Mean.96 Median. Maximum 4. Minimum. SD Amakudari_Financial Mean.618 Median. Maximum 7. Minimum. SD Amakudari_Quasi-Government Mean.39 Median. Maximum 5. Minimum. SD The number of Amakudari by three subcategories III. Poisson Regression Model for Explaining Amakudari Using the number of Amakudari as the dependent variable is a counting process that takes only integer values. Thus, the article explores why and how many Amakudari exist in each Japanese-listed company by running a counting process regression, specifically employing the Poisson Regression. Our political economy model is as follows: The number of Amakudari ¼ f(industry, last year s sales, this year s sales, sales increase rate from previous year, existence of traded union, different type of stockholder ownerships, the number of employee) þ error 6 where the degree of sales increase indicates whether a firm is growing or decaying and the sales amount indicates the size of each company. While the popular classical linear regression model takes a continuous dependent variable on a range of values that further allows normality assumption, my explained variable, the number of Amakudari, takes only few integer values between and 9 in all categories: and 7 from the financial sector, to 4 in the bureaucratic sector, and to 5 from the quasigovernment sector. Therefore, the classical linear regression (CLM) framework cannot be used for our dependent variables; instead the Poisson regression model will be used. 7 Also, the Poisson distribution has a very robust property of having consistent, asymptotically normal coefficient estimators. 8 Since the Poisson distribution allows us to find conditional probabilities for any values of the explanatory variables and is entirely determined by its mean (and the variance is equal to the mean), it is sufficient to specify the conditional mean. In addition, the data are intrinsically heteroskedastic with variance increasing with the conditional mean. The Poisson regression model is derived from the Poisson distribution by parameterizing the relationship between the conditional mean and regressors x i Ey ð i j x i Þ ¼ exp x i 6 The regression experiments of this study indicate that industry, last year s sales and sales increase rate were not consistently significant. 7 See Cameron and Trivedi (1998) and Wooldridge (26) for more information. 8 Wooldridge (26, p. 66) indicates that, although Poisson analysis is a natural first step for count data, it is often much too restrictive since all probabilities and higher moments of the Poisson distribution are determined entirely by the mean. Wooldridge (26, p. 69) says, If we are interested in the effect of an independent variable on the mean response, there is little reason to go beyond Poisson regression, which is of interest. Also considering more rigorous (fully or partially) parametric count regression models such as negative binomial model, simulated maximum likelihood, finite mixture models (in Cameron and Trivedi (25)) will be a future work.

5 Determining the existence of Amakudari in publicly-traded Japanese companies 111 Table 2. The Poisson regression results Narrower sense of Broader sense of Amakudari Amakudari Amakudari Amakudari Amakudari bureaucracy financial quasi-government Coeff. t-stat Coeff. t-stat Coeff. t-stat Coeff. t-stat Coeff. t-stat Employment Previous year s sales Dummy_trading union Ownership by Government Financial institution Securities Other corporations Foreigners Constant where by assumption there are k linearly independent variables. Note that Ey ð i j x i Þ ¼ Varðy i j x i Þ. The loglikelihood function is ln L ¼ XT y i x i exp x i lnðy i!þ i¼1 And under misspecification of the correctly specified density, the quasi-maximum likelihood estimators are obtained. IV. Interpreting Poisson Regression Results The number of Amakudari is a nonnegative integer that the study wishes to analyse in terms of a set of regressors such as employment, sales, the existence of a trade union, and what types of ownership the company are under. These allow for better interpretation and understanding of Amakudari, both total and within the three subgroups, and their patterns of existence within publicly traded Japanese companies. Table 2 displays our Poisson regression results where the dependent variables are discrete, with a distribution that places probability mass at nonnegative integer values only. The first and second columns of Table 2 provide a general picture in determining the number of Amakudari both broadly and narrowly defined. That is, the higher a company s sales, the greater the number of Amakudari (both in narrow and broad definitions) present within that company. This could be interpreted that large and well-performing firms are in an advantageous position to appoint and maintain more Amakudari because hiring requires heavy economic costs. Therefore, having a strong financial affordability allows the firms with higher sales to have a greater number of Amakudari. The companies with higher government ownership usually hire more Amakudari from the government sector. Higher government ownership implies higher government intervention on firms. Government, in general, holds higher ownership and voice in the firms and industries in which strong regulations exist. Regulation creates rent, which is accompanied by the informal politics for firms to get and hunt for more rent. Controlling ministries, hoping to secure more positions to compensate for the retired high ranking officials, have every incentive to push Amakudari into private firms. On the other hand, private firms want to pull influential retired bureaucrats to build friendly institutional and business environment. This mechanism and incentive structure, developed between government and private firms, are believed to increase the number of Amakudari. On the contrary, if other corporations have a bigger share in the company, then the number of Amakudari decreases. A bigger share from other companies leads to a larger number of non- Amakudari directors. In addition, the more the narrowly defined Amakudari are hired, as the company is larger in employment, the higher the government ownership is. In contrast, when a company has a trade union, this company keeps more directors from broadly defined Amakudari. Reform-oriented trade unions have expectedly raised strong opposition to the appointment of Amakudari directors from nonmarket entities. However, trade unions in Japan, characterized by strong government intervention and regulations, maintain very cooperative and stable relations with the management of the firms. With this backdrop, trade unions are likely to build cooperative strategies with management and the government to get more

6 112 S.-Y. Rhyu benefits and job securities from welcoming a larger number of influential Amakudari from the government sector. Furthermore, when subgroups of Amakudari are considered, we have quite different characteristics: For the Poisson regression on Amakudari that are hired from the government (called bureaucracy), the larger-size companies with bigger employment and bigger sales are shown to hire more ex-officials of government. Also, for the companies that both the government and financial institution have a large percentage of ownership, more hires come from Amakudari originating from the government sectors. It is apparent that government interest has a positive impact on hiring more Amakudari. Interestingly, if other corporations have shares in the firm, however, the hiring of Amakudari is reduced. In the analysis of the financial sector including main banks, it is observed that sales and the existence of a trade union have a positive impact on Amakudari who are employed from financial institutions. The publicly traded companies having the lower government ownership and higher ownership from financial institution may employ more Amakudari which originated from financial sectors. Furthermore, if other corporations have higher ownership in the firm then the number of Amakudari employed in the firm will be less. Note that the companies with higher ownership from financial institutions usually hire more Amakudari both from the government sector and from the financial sectors. Publicly traded companies having higher government ownership usually hire more Amakudari from the government sectors and less Amakudari from the financial sectors. Depending on the ownership structure and characteristics of firms, Amakudari from the government sectors can play a substitutive role of Amakudari hired from the financial sectors. Most of the firms do not need to appoint Amakudari from the government sectors and from the financial sectors simultaneously. Moreover, the Japanese government doesn t feel the need for pushing more Amakudari from main banks into the firms already hiring many Amakudari from the government sectors, since the role of Japanese main banks, as delegated monitors, is partly overlapping with the monitoring role of government over corporate sectors. For Amakudari from the quasi-government sector, it is only if ownership by financial institutions is present would there be an increase in the number of Amakudari hired from quasi-government companies. This phenomenon arguably comes from the predominant existence of financial institutions with higher government ownership in the sectors of quasi government in Japan. However, foreign ownership reduces the number of Amakudari hired from quasigovernment companies. Foreign ownership in Japanese firms has been relatively low and foreign investors prefer to invest in firms which are transparent and are less subject to Japanese peculiar socio-cultural factors and networks. Higher foreign ownership tends to reduce the number of Amakudari from the quasi-government sectors. For foreign investors, Japan s large quasi-government sectors, embedded in Japanese society and culture, are regarded as an invisible entry barrier to the Japanese market. V. Conclusion Amakudari is a frequently observable phenomenon in the Japanese economy, especially in firms that intend to tap into the experiences of retired high-ranking government officials. These companies appoint these officials into positions of trust to become members of the board of directors or directors of the company. This article separates various kinds of Amakudari into their former workplace: government, financial sector and quasi government. The study finds different characteristics on their hires, which is stylized in this article. More Amakudari are hired from the financial sector than from the government sector (bureaucracy) or quasi-government sectors. When Amakudari are hired from the narrower definition of government, more Amakudari are employed from the bureaucracy compared to quasi government. When Amakudari are hired from one of the three subgroups, subsequent hiring will be made from the same sector. The higher a company s sales, the greater the number of Amakudari (both in narrow and broad definition) present within that company. The companies with higher government ownership usually hire more Amakudari from the government sector. When a company has a trade union, this company keeps more directors from broadly defined Amakudari. The publicly traded companies holding higher government ownership usually hire more Amakudari from the government sectors, but less Amakudari from the financial sectors. Foreign ownership reduces the number of Amakudari hired from quasigovernment companies. My subsequent work includes measuring economic influence of Amakudari on the company by using a richer crosssectional time-series dataset.

7 Determining the existence of Amakudari in publicly-traded Japanese companies 113 Acknowledgements I would like to thank Prof. Yongil Jeon for his helpful discussions and advice. Min-ji Park and Chan-hee Yoon provided a valuable contribution to the compilation of the database. This study was partly supported by research fund of the Yonsei Center for Global Studies, Yonsei University. References Asano, A. and Eto, T. (23) The game theoretic analysis of the Amakudari practice in the Japanese banking system, Working Papers in Economics and Econometrics No. 434, The Australian National University (October). Calder, K. E. (1988) Crisis and Compensation: Public Policy and Political Stability in Japan, , Princeton University Press, Princeton. Calder, K. E. (1989) Elites in an equalizing role: ex-bureaucrats as coordinators and intermediaries in the Japanese government-business relationship, Comparative Politics, 21, Cameron, A. C. and Trivedi, P. K. (1998) Regression Analysis of Count Data, Cambridge University Press, Cambridge. Cameron, A. C. and Trivedi, P. K. (25) Microeconometrics, Cambridge University Press, Cambridge. Colignon, R. A. and Usui, C. (23) Amakudari: The Hidden Fabric of Japan s Economy, Cornell University Press, New York. Horiuchi, A. and Shimizu, K. (21) Did Amakudari undermine the effectiveness of regulator monitoring in Japan?, Journal of Banking & Finance, 25, Nakano, K. (1998) Becoming a policy ministry: the organization and Amakudari of the ministry of posts and telecommunications, Journal of Japanese Studies, 24, Nihon, K. S. (24) Kaisha Nenkan 24 [NIKKEI: Annual Corporation Reports 24]. Tokyo: Nihon Keizai Shimbun (in Japanese). Schaede, U. (1995) The old boy network and governmentbusiness relationships in Japan, Journal of Japanese Studies, 21, Suzuki, K. I. (21) Effect of Amakudari on bank performance in the post-bubble period, Working Paper No. 136, Stockholm School of Economics (November). Wooldridge, J. M. (26) Introductory Econometrics, 3rd edn, Thomson Publisher, South-Western.

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