Large Shareholders and Banks: Who Monitors and How?

We investigate the nature of monitoring by stake holders using data on Japanese manufacturing firms. Shareholders and bank-centred corporate groups monitor firms by reducing activities with scope for managerial moral hazard such as advertising, R&D and entertainment expenses. Monitoring of this type takes place even when the monitored firm is not in financial distress. Although in Japan it is difficult to distinguish empirically between monitoring motivated by debt and monitoring motivated by equity stake, the data indicate that shareholders monitor firms continuously, while debt holders may intervene when firm performance is poor.