The emergence of portfolio restructuring in Japan.
| Verfasser | Wu, Zhonghua |
| Posten | RESEARCH ARTICLE |
Abstract:
* We examine the role of stakeholders as an influence in the practice of portfolio restructuring. We contend that with the presence and creation of new legal arrangements and regulations, portfolio restructuring achieved widespread usage, but only when the initiatives were consistent with the interests of the most powerful social actors in a firm.
* Building on a stakeholder power approach to corporate governance, we examine whether the interests of relational banks, managers, and business groups were consistent with the practices of portfolio restructuring we observed in Japanese firms in the 1998 to 2005 period.
* Regressions using data on 174 Japanese machinery firms lend support to predictions that portfolio restructuring increases in frequency with the extent to which business groups' strategies are facilitated and decreases with the degree to which banks' interests are protected. The association between the frequency of portfolio restructuring and managerial interests depends on the level of managerial ownership.
Keywords: Portfolio restructuring * Divesture * Asset expansion * Corporate governance * Stakeholder influence * Japan
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Introduction
Corporate restructuring is an action that alters the structure, composition or orientation of a firm in response to changing external environments or altered internal organizational conditions (Bowman/Singh 1993, Kang/Shivdasani 1997). By realigning a firm's business and resources with its environment, corporate restructuring aims to improve returns from the deployment of the firm's assets.
A firm's managers can implement a variety of restructuring activities including portfolio, financial, and organizational restructuring (Gibbs 1993). In this study, we focus on an important subset of portfolio restructuring activities: namely, asset divesture and asset expansion restructuring. Different forms of restructuring interact with each other. For instance, portfolio restructuring can bring in organizational and financial restructuring, such as executive turnover, layoff, costly financial charges, and negative public perception (Hoskisson/Hitt 1994).
Even though restructuring activities can be prominent ones in a firm, a number of scholars have identified that weaknesses in ownership and governance systems can be key obstacles to restructuring (Bethel/Liebeskind 1993, Hanson/Song 2003). The governance literature emphasizes that with properly defined agency relationships, managers would implement a strategy that is in the best interest of shareholders. However, in economies where the agency relationships are not clearly defined, for example, Japan and Germany, the coordination of stakeholders becomes a major obstacle to the implementation of shareholder wealth maximizing strategies (Buck/Filatochev/Wright 1998). When the influences of stakeholders over corporate decisions become stronger relative to that of the shareholders, the initiation and implementation of corporate restructuring requires a complex cooperation among stakeholders. Principal-agent models hence become of less use to explain such behavior. Furthermore, the mechanisms of coordination are particularly important when firms are faced with radical environmental uncertainties or operational risks. If there is substantial uncertainty about the process and consequence of a strategic action, policymakers and managers can easily become hesitant to push for such a change in action.
Existing studies of portfolio restructuring have focused on the diversification behaviour of the firm, as pioneered by Wernerfelt and Montgomery (1988). Comment and Jarrell (1995) argue that a focusing strategy is consistent with the maximization of shareholder value, and Daley, Mehrotra, and Sivakumar (1997) find that a firm can increase its value through spinning-off unrelated lines of businesses. These studies focus on firms in the US, but literature on portfolio restructuring in Japan after the banking crisis in 1997 is scarce. Our purpose is not to complement the previously cited literature in evaluating the diversification strategy of Japanese firms, but instead to focus on portfolio restructuring in Japan from the perspective of both divesture activities and related-asset expansion activities.
Accordingly, we seek to explain the differing levels of portfolio restructuring activity across firms. We adopt a stakeholder power perspective on corporate governance and consider differences among stakeholders in their power to defend their interests relative to those of other stakeholders as a primary influence on the type and intensity of restructuring undertaken in these firms. We build on earlier work by providing a systematic justification for the observed choices of the most relevant stakeholders on portfolio restructuring and by offering a specific conceptual and empirical analysis of their interests and power. Specifically, we argue that with the presence and creation of an appropriate regulatory and legal infrastructure, as in the case of Japan since late 1990s, portfolio restructuring could not achieve widespread usage unless it was consistent with the interests of a firm's most relevant stakeholders. In terms of stakeholders, we examine whether the interests of relational banks, business groups and top managers were consistent with the practice of portfolio restructuring.
To address these questions, we utilized an empirical context in which there were changing institutional and regulatory conditions, and one in which shareholders were not clearly dominant in influencing the strategic direction of a firm. The Japanese economy after the collapse of the bubble economy in early 1990s and the banking crisis worsened in 1997 yielded this setting. Following the collapse of the economy, the increased awareness in the public and private sectors in Japan on restoring industrial profitability led to substantial changes in the regulatory and legal environment. At the same time, Japanese firms' stakeholders had developed more influence than owners as shareholders. Up until the onset of the 2000s, Japanese firms had been embedded in firm-bank relationships, and banks acted as important stakeholders to industrial firms. We capitalized on these characteristics of this setting, and utilized a sample of 174 Japanese machinery firms over the period 1998-2005 to test our hypotheses.
Background anal Hypothesis Development
Restructuring
When considering the action of portfolio restructuring, a firm's managers can choose to refocus on the core business of the firm via the divestment of unrelated businesses (downscoping), or choose to integrate operations through the selective acquisition or establishment of businesses related to the core business (asset expansion).
Portfolio restructuring may lead to a change in a society's impressions of the viability and sustainability of an organization (Davis/Diekmann/Tinsley 1994). Moreover, portfolio restructuring can be difficult: divestitures were described as "failed acquisition attempts" (Montgomery/Wilson 1986). This leads to the question concerning why we observe portfolio restructuring? Previous studies have found that the gains of portfolio restructuring come from the elimination of negative synergies (Hite/Owers/Rogers 1987). For example, assets unrelated to core operations may prevent a firm from focusing on developing and exploiting its core competencies. Portfolio restructuring can also reduce market inefficiencies or agency costs. For instance, managers typically are reluctant to raise capital through asset sales unless asymmetric information, debt overhang, or managerial discretion makes an equity offering too expensive (Lang/Poulsen/Stulz 1995). However, if the proceeds from asset sales are used to repay debt, be distributed as dividends, or buy back shares, agency costs are reduced (Hanson/Song 2003).
New institutional theorists contend that corporate restructuring emerged as a dominant strategy in the last three decades as a response to major changes in the business environment, such as the relaxation in the enforcement of antitrust legislation, changes in tax laws, innovations in external markets and changes in competition (Shleifer/Vishny 1990, Bowman/Singh 1993, Mitchell/Mulherin 1996). For example, changing regulatory environments and shifts in power and resources can transform corporations that were the embodiment of entrenched notions of the firm and its appropriate organizational form, as evidenced by the wholesale breakup of US business conglomerates through takeovers, leveraged buyouts, and investor pressure (Davis/Diekmann/Tinsley 1994).
If a portfolio restructuring increases the level of discrepancy between the actual organizational structure and the institutionally prescribed ideal, a firm can be confronted with significant risks, including the loss of legitimacy and reputation, which might also be met by a declining performance (Heugens/Schenk 2004). To avoid such an outcome, institutional theorists make the point that when a firm is subject to institutional pressures, it will adopt the predefined roles and routines that reflect the prescriptions conveyed by the wider, previously rationalized and legitimated institutional environment. Top managers anticipating these risks can judge the relative magnitude of the perils of restructuring and its uncertain benefits, while other corporate stakeholders who structure the operating environments of the firms may exercise their power to influence corporate decisions on portfolio restructuring (DiMaggio/Powell 1983, Palmer/Barber 2001).
While institutional pressures operate at the institutional field level (DiMaggio/Powell 1983) or societal level (Meyer/Rowan 1977), stakeholder relations principally operate at the firm level. Once initiated, portfolio restructuring is expected to eventually uproot the status quo and shift the distribution of burdens and rewards in favor of some stakeholders and to the...
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