乾/σ7ギ)≦力≦角σ7血 gener劇 .
To conclude, shareholders benefit fronl the introduction of stOck invest配 1‑
ent opportunity even if the managers and shareholders of the two companies strategically choose their own variables. The shareholder's beneit, howev―
er, is less compared to the situation where the investrnent is single sided.
This is because, when it is mutual, the risk reduction effect of the stOck investment dechnes. As a consequence, in order to obtain the participation of managers who face a greater uncertainty, the shareholders must weak―
en the link between the company's performance and managerial reward.
The existence of outside investrnent opportunity itself, however, should still benefit the shareholders because such investment reduces the risk preHllum. We must also bear in Hlind that this happens only when the
incentive contract is based on value― of―the―nrm and not on operating― proit.
4. Conclutting Remarks
The models presented in this paper combine the agency problem、 vith the risk̲sharing argument for cOrporate shareholding. They are different
frorn Aoki's model in many respects. First, Operating pronts depend not on―
ly on stOchastic events,but also on the level of effort which is endOgenous―
ly deterrnined by managers, given the incentive contract. Secondly, investrll―
ent decislons are also made non― cooperatively in each firm. Unlike Aoki's swap model, the investrnent does not have tO be reciprocal. Lastly, but most importantly, the degree of managerial reward's hnk to the company's performance, as well as a ix wage, are endogenously deterHlined by the shareholders, while these factors are not in Aoki's model.
With a unllateral investlnent rllodel,we ind that if rnanager's degree of risk aversion is small, shareholders offer high work incentives with a negative wage to the manager. In the extreme, if a manager is risk̲neutral, the manager becomes the residual clairnant and pays a high franchise fee"
( 1 . e . n e g a t i v e w a g e ) t o t h e s h a r e h o l d e r . F o r m a n a g e r s w i t h a m e d i u m degree of risk aversiOn, shareh01ders lower the rate of managerial reward which is linked to the firnl's performance, and may have to pay a positive nxed wage to keep the managers in the cOmpany. If managers are highly risk averse, shareholders lower the link tO the performance further. The risk prenllum remains high because the managers are highly risk averse,
but is not so high because the managerial reward is linked 、 veakly to the performance of the company. Hence the wage dOes not have to be so high
to keep the managers in the company. With such factOrs serving to lower incentive, the pront of the company with highly risk averse managers is low.
Conditions fOr a pOsitive stock investrnent in the unllateral model are;
162 The Hikone Ronso No.330
( 1 ) t h e m a n a g e r i s r i s k a v e r s e , ( 2 ) h e r m a n a g e r i a l r e w a r d i s l i n k e d w i t h the value of the irrn she manages,and 13)the operating pronts of invest―
ing and invested companies is negatively correlated. Corporate investlnent
is larger if the invested company's operating pront is iess volatile and/or if the covariance in the operating profits of the companies is more strong―
ly negative.
With the bilateral investrnent decislon model, we nnd― 一一一in additlon to the above results― 一一一that corporate investrnent tends to be larger if the investing company's operating profit is less volatile and/or if there is less counter investrnent froHl the invested firln to the investing irm. We also ind that shareholders' payoffs are lo、ver than in the unilateral investrn―
ent model, because the mutuality of investment reduces the risk reduction effect of stock investrnent in the bilateral investrnent model.
The relevance of these outcomes to the existing empirical literature is as follows.
A c c o r d i n g t o K a p l a n ( 1 9 9 4 ) , m a n a g e r i a l c o m p e n s a t i o n i n m a n y c o m p a n i e s in Japan and the United States is linked more strongly to overall perforln―
ance measures such as the rate of return on total assets or stock returns than to sales―performance measures such as the growth rate of sales. Our models in this paper provide an explanation why the incentive contract is more likely to be based on overall performance which includes investrnent income, rather than sales performance which does not. The risk― sharing argument says that corporate shareholding reduces the risk borne by
managers compared to the case where no corporate shareholding is allowed.
In our model, this benefits shareholders who extract all the rents from the managers. As we have seen, for this to happen, the perfomance paym―
ent must be based on the value of the irm rather than operating profit.
If shareholders choose the operating― pront―based payment scheme instead,
they must offer lower work incentives to managers and end up receiving lower payoffs.
Another rarnincation of our theoretical model is that companies with corporate stock investrllents exhibit lower but less volatile profits after dividends than companies without them. A positive investment is an indica一 tion of risk―averse managers. The more risk̲averse are the managers, the equllibriunl level of effort, and hence the profit, is lower. Profits after dividends are less volatile in the irms with stock investment. In summary, compared to other arguments for corporate shareholding, our risk sharing model provides a more consistent explanatiOn for the styhzed facts that companies which are more involved in inter̲corporate shareholding exhibit lower but less volatile profit rates measured by return on assets.
Finally, using panel data of 186」 apanese cOrporate grOup irms from 1980 to 1988,Nakano(1999)tests predictions drawn from the three maiOr arguments for corporate shareholding, including the risk̲sharing argument.
The study finds a weaker evidence to support the risk̲sharing argument:
Fiィms with less risky operating profits tend tO attract more investrnent, but the relationship between investrnent and the covariance in the firms' operating prOits is ambiguous. This possibly suggests that firms dO not efficiently use informatiOns on the riskiness of cOmpanies when making stock investment decislons.See Nakano(1999)for more detall.
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