A Test of the Two-Tier Corporate Governance Structure : The Case of Japanese Keiretsu

We examine the effect of corporate governance structure on the relation between ownership structure and financial leverage among Japanese firms. Under normal conditions, no significant relation between ownership variables and financial leverage exists. When firms signal financial difficulties, however, keiretsu financial institution equity owners intervene to moderate the use of debt. This evidence reveals the existence of a keiretsu two-tier corporate governance system. In the first stage, the unique corporate cross-shareholding allows mutual monitoring under normal circumstances. In the second stage, when firms get into financial trouble, keiretsu financial institutions assume control by reducing debt levels. The results highlight differences between keiretsu and independent corporate governance structures