Conclusions

Japanese firms have some features that are different from firms in other capitalist economies. It is said that, Japanese firms’ objective is to maximize all stakeholders’ interests rather than just the ones of shareholders. Therefore, in this paper, I used Japanese data to test the impacts of stakeholders on firm’s debt ratio.

I found some interesting results as follows:

1) First, the largest Japanese shareholder (SH) in a firm has negative impact on debt ratio. First largest shareholder usually is a cross-shareholder that has strong mutual ties such as in a buyer-supplier relationship. Bankruptcy means the loss of both equity value and of the business; thus there is the incentive to lower debt ratio in order to avoid these costs. This finding shows the difference between Japanese and American shareholders. American shareholders usually increase debt ratio to gain the utmost benefit of tax-saving effect or reduce free cash flow to prevent managers from investing in self-interest projects.

2) Managers (MH) have negative effect on leverage. One thing that motivates Japanese managers to lower debt ratio is because most of them are in-house promoted managers who have spent many years within the firm, and climbed through a long career ladder. If the firm goes bankrupt, their years of effort become useless as they may be replaced.

Nevertheless, when the proportion held by shareholders and managers reaches a certain point (the threshold), debt ratio is expected to be increased. That is, the relationship between shareholders/managers and debt ratio is a quadratic function in which the parabola opens upward.

3) Firms that consider employees’ interest have lower debt level. The factor representing employees, TKH, has negative impact on leverage but its economic impact is the smallest compared to other stakeholders’ factors.

4) The client, CLT, factor also has negative effect on leverage. This is because clients have strong bargaining power over the firm (i.e. the ability to choose one firm among many). For example, if the firm goes bankrupt, the supplying of parts or services may also be stopped or cut. In this case, the client bears all these costs.

As a result, before buying a product or using a service, he will choose the one with the lowest default risk, particularly, when it is dealing with durable products.

5) Suppliers (SUP), however, show positive sign toward debt ratio which inverse with my hypothesis. This puzzling result may suggest that, suppliers have weak bargaining power with the firm (i.e. the firm may be chosen among many other competitors). In other words, a firm takes the position as a client who is be able to choose one supplier among many. Therefore, the reverse hypothesis is that, the stronger the bargaining power a firm has with its suppliers, the higher the debt ratio can be. Further empirical study is necessary to clarify the relationship between the suppliers and a firm’s debt. One suggestion to solve this problem is by dividing the sample into two groups, one is business to business (B to B) group and the other is business to consumer (B to C) group. In B to B group, the relationship is likely to continue or last for a long period. In this group financial distress should be considered. Whereas, in B to C group, the transaction may not be permanent or be just a spot transaction, thus the suppliers do not care too much about that firm’s financial condition.

6) Finally, the real factors such as firm size, profitability and asset’s structure are also significant in explaining Japanese firms’ capital structure. This result is consistent with Hirota (1999). Adding to his finding, my result suggests that real

factors in capital structure theory developed in the United States also have compatible power to explain Japanese firms’ financial decisions after the post bubble Japanese economy.

In sum, though more empirical tests of the impact of stakeholders on capital structure are needed, this paper shows that, besides real factors, stakeholders also have a crucial role in firms’ decisions to choose between debt and equity.

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