Keiretsu Membership, Firm Size, and Corporate Returns on Value and Cost

40 Pages Posted: 22 Nov 2000

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance

Piet Sercu

FEB at KU Leuven

Charles J.P. Chen

City University of Hong Kong (CityU) - Department of Accountancy

Date Written: October 2000

Abstract

We test how keiretsu membership affects the Fama and French (1999) required IRR on value (or cost of capital) and the IRR on cost (or return on investment), 1974-95, of all listed non-financials in Japan. Rather than computing point estimates from aggregate data, we employ non-linear cross-sectional regression analysis of individual-firm data and we control for industry and size factors in returns. We find that firms have added value--and significantly so--regardless of industry, size, and governance system. In terms of cost of capital, we find no evidence of a keiretsu advantage. In fact, within the segment of medium- and small-sized firms the keiretsu ones often have the higher expected return on value. In terms of return on investment, mid- and low-cap firms show no clear difference but top-league keiretsu firms notched up definitely lower numbers than did comparable non-keiretsu ones. Our interpretation is that keiretsu groups have cross-subsidized their larger member firms, a strategy that led the latter to over-invest.

Keywords: Cost of Capital, Return on Investment, Value Added, Corporate Governance, keiretsu

JEL Classification: G31, G32

Suggested Citation

Wu, Xueping and Sercu, Piet M. F. A. and Chen, Charles Jieping, Keiretsu Membership, Firm Size, and Corporate Returns on Value and Cost (October 2000). Available at SSRN: https://ssrn.com/abstract=248408 or http://dx.doi.org/10.2139/ssrn.248408

Xueping Wu (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
Belgium
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

Charles Jieping Chen

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788-7909 (Phone)
+852 2788-7944 (Fax)