Policy Research Institute

Table of Contents

Vol. 132 : Corporate Sector’s Financial Surplus and Corporate Governance


Summary of Articles

Companies’ Financial Surpluses and Cash/Deposit Holdings

Author
By Shin-ichi Fukuda(Professor, University of Tokyo Faculty of Economics)

(Abstract)

Japanese companies have increased their financial surpluses and cash/deposit holdings dramatically in recent years. The financial surpluses increased because Japanese companies have achieved earnings recovery to enhance their financial soundness. However, most financial surpluses are held in the form of liquid deposits carrying interest rates close to zero, leading to Japanese companies’ slack return on equity. This paper analyzes what caused growing cash/deposit holdings at companies and considers what corporate governance is desirable for Japanese companies. After overviewing previous related studies, the paper first uses a three-period model to theoretically explain the mechanism for companies to hold highly liquid assets. It then looks into why Japanese companies increased highly liquid deposits in recent years based on industry-by-industry data and on individual company level data. The empirical analysis shows that why Japanese companies showed the sharp increase in liquid deposits is in marked contrast between small and medium-sized companies and large companies. That is, small and medium-sized companies tended to hold liquid deposits by preparatory motivation to mitigate future borrowing constraints. In contrast, large companies tended to hold liquid deposits because they have failed to realize potential investment opportunities in the domestic market while facing such opportunities. In addition, large companies have various motivations to hold highly liquid assets. We find that some blue-chip companies have raised long-term, low-interest funds to increase liquid deposit holdings as growth funds for potential new investment opportunities.


Keywords: Fund surpluses, companies’ cash and deposits, corporate governance
JEL Classification: G32, G34

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Corporate Financial Surpluses and Cash Flow Use in Japan
-Analysis of Corporate Statistics Survey Data by Enterprise Size-

Author
By Jun-ichi Nakamura(General Manager, Research Institute of Capital Formation Development Bank of Japan)

(Abstract)

This paper used annual survey slips data in the Ministry of Finance’s Financial Statements Statistics of Corporations by Industry to analyze financial surpluses (excess savings), cash holdings and investment behaviors at enterprises of various share capital sizes and their determinants in 20 years between 1996 and 2015 when the corporate sector continued to post financial surpluses or excess savings. Excess saving and cash holding function estimation results identified financial constraints mainly at micro and small enterprises and preparations for lumpy investment as factors behind excess savings and cash holdings. While no behavior of expanding savings to accumulate cash or repay debt was identified, the results indicated the possible excessive accumulation of cash caused by corporate governance problems. Cash flow function estimation results confirmed that the propensity to spend changed in the direction of giving priority to securing liquidity after the global financial crisis and that smaller firms have a higher propensity to spend on cash accumulation. Meanwhile, firms featuring business diversification and more board members tend to restrict outflow of cash. This tendency is strong particularly among large firms. Even in the case that large firms accumulate cash in preparation for future investment, it was found that mergers, acquisitions and direct overseas investment were in mind, rather than domestic plant and equipment investment.


Keywords: Financial surpluses, excess savings, cash holdings, cash flow use, corporate governance
JEL Classification: D22, E22, G31, G32

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Analyzing Determinants of Corporate Investment Behavior
-Progress in Investment Diversification and Roles of Internal Funds-

Author
By Masaharu Hanazaki(Professor, Hitotsubashi University Graduate School of Commerce and Management)
By Tetsuya Hada(Ph. D. Student, Hitotsubashi University Graduate School of Commerce and Management)

(Abstract)

This paper uses panel data of Japanese manufacturing companies to estimate a plant and equipment investment function and a broadly defined investment function to empirically analyze the following two hypotheses regarding investment. The first hypothesis is that Japanese companies are too safety-oriented to promote investment. The second hypothesis is that broadly defined investment including merger and acquisition, and research and development investment as well as plant and equipment investment is not necessarily restricted as M&A and R&D investment is increasing, even though with plant and equipment investment being restricted. The empirical analysis has produced three findings. First, the broadly defined investment function’s explanatory power is generally strong, indicating that companies give priority to broadly defined investment in making business decisions. Second, investment behavior at the time of the Lehman Shock differed from that before and after the shock. Third, companies with financial surpluses, as well as those with financial deficits, base investment level decisions on their internal funds levels. Companies with financial deficits, which are relatively proactive towards investment, give priority to internal fund factors as well as real factors in making investment decisions. Given the above, the both hypotheses subjected to this analysis are apparently supported to some extent.


Keywords: Plant and equipment investment, broadly defined investment, internal funds constraints
JEL Classification: D22, G31

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Geographical Distribution of Major Japanese Exporters’ Production and Sales Structure and Their Capital Investment Behavior

Author
By Satoshi Koibuchi(Associate Professor, Faculty of Commerce, Chuo University)
By Mizuki Goto(Graduate Student, Graduate School of Economics, Hitotsubashi University)

(Abstract)

A factor behind massive cash reserves held by companies is that they stably continue to receive cash flow over a long term while finding insufficient investment opportunities. Using information on the geographical distribution of production, sales and assets available in corporate financial statements, this study observed how Japan’s three major export-oriented manufacturing industries – automobiles, general machinery (machine tools, construction machines, industrial robots, etc.) and electrical machinery (comprehensive electrical machines, electronic devices, etc.) – shifted their geographical distribution of production, sales and assets in the world’s four major regions – Japan, North America, Europe and others including Asia – during the fiscal years from 1999 to 2015. Observed results indicate the following four remarkable findings. First, the three industries reduced Japan’s share of their sales and assets continuously and substantially while increasing the share for the others including Asia continuously and substantially between the beginning of the 2000s and the mid-2010s. Second, Japan even as of the mid-2010s was still positioned as a production base for exports characterized by large existing production capacity and massive sales to other regions. Third, the operating profit ratio for Japan was remarkably higher than for other regions in the observation period excluding several years after the global financial crisis. Fourth, growth in plant and equipment investment in Japan was slower than in the other regions over a long term. Given these findings, a region-by-region breakdown of production, sales and assets at major Japanese export-oriented manufacturers indicates that robust cash flow and less opportunities for plant and equipment investment characterize head offices and corporate divisions located in Japan of Japanese companies that have built networks of local subsidiaries in major regions of the world.


Keywords: Production and sales structure, plant and equipment investment, cash flow, geographical distribution
JEL Classification: F23, F21, C31

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Entrepreneurship, and Plant and Equipment Investment
-Another Explanation of Investment Slump under Deflation-

Author
By Shin-ichi Fukuda(Professor, University of Tokyo Faculty of Economics)
By Munehisa Kasuya(Professor, Faculty of Economics, Meisei University)
By Masayuki Keida(Associate Professor, Faculty of Economics, Rissho University)

(Abstract)

This paper analyzed factors behind listed companies’ plant and equipment investment slump in the Japanese economy plagued with deflation, by using financial data of companies and corporate managers’ attribute information to estimate investment functions. Estimated investment functions of listed companies found that not only Tobin’s q, cash flow and other standard financial variables but also corporate managers’ attributes including presidents’ careers and ages, and business owner or other presidents, and executive bonuses’ shares of profit exert significant influences on plant and equipment investment at listed companies. Listed companies have had more diverse fundraising means than small and medium enterprises and should have had less fund constraints on plant and equipment investment even under the financial crisis. This paper’s finding indicates that corporate managers’ stances on plant and equipment investment after the collapse of economic bubbles, in addition to deteriorating fundamentals at listed companies, worked to reduce these companies’ plant and equipment investment in the deflation-plagued Japanese economy.


Keywords: plant and equipment investment, deflation, entrepreneurship
JEL Classification: G31, G32

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Firms’ Liquidity Assets and Workers’ Claims

Author
By Mariko Tanaka(Assistant Professor, Department of Economics, Faculty of Economics, Musashino University)

(Abstract)

Primary stakeholders for a firm include shareholders, banks, other creditors, and employees (workers). This study pays attention to the role of employees that has rarely been analyzed in an explicit form in the field of corporate finance and clarifies that the presence of workers’ claims could have great influences on firms’ fundraising operations, particularly on accumulation of liquidity assets. In general, workers’ claims are paid before other claims when firms face with liquidity shortages. In an economy where workers’ claims are given priority, companies could fail to raise sufficient funds due to their excessive burden to pay workers’ claims when additional funds are required in unexpected forms. To forestall such fund shortages, firms may accumulate liquidity assets. Liquidity assets, though far less profitable, can help cover unexpected fund shortages. This study finds that firms tend to accumulate more liquidity assets preemptively in line with growth in workers’ claims. This finding indicates that the presence of workers’ claims is an important factor behind an increase in liquidity assets of firms and that labor-intensive firms with greater workers’ claims tend to accumulate more liquidity assets.


Keywords: Liquidity shock, control right, workers’ claims
JEL Classification: A12, B34, C56

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