Introduction

Over the last decade, capital-structure differences between U.S. and Japanese firms have been the source of considerable comment. Much of the discussion has focused on overall debt-to-equity ratios, with several authors attempting to provide an economic rationale for the apparently greater borrowing propensity of Japanese firms. Other authors have suggested that the generally higher debt-to-equity ratios of Japanese firms result in lower overall capital costs and a consequent competitive advantage relative to their U.S. counterparts. Still other authors have argued that the apparently higher debt-to-equity ratios are largely accounting artifacts.

Despite the acknowledged problems with accounting measures, there do appear to be substantial differences in borrowing practices between the two countries. Not only are average debt-to-equity ratios somewhat higher for Japanese corporations, but they are extraordinarily high (by U.S. standards) for some firms. Furthermore, the maturity composition of this debt, as well as the role played by financial intermediaries, has been quite different for Japanese borrowers.

One purpose of this chapter is to explore such differences and see what they can tell us about the plausibility of different capital-structure theories. Another purpose is to examine the use of financial intermediation and delegated monitoring (monitoring by the primary creditor) in dealing with bankruptcy risks. Particularly with regard to Japanese lending practices, this chapter will emphasize the role of financial-market regulation. Indeed, the past nature of that regulation fostered development of the “main-bank” lending system in Japan.