Determinants of managers' choices in the Japanese banking industry

This study investigates the effects of recent changes in Japanese banking regulations and bank managers' reactions to those changes. I employ a dichotomous probit regression approach and show that banks with lower pre-choice regulatory capital are more likely to adopt methods made available to them by bank regulators, consistent with the expressed purposes of the regulators. I find that other attributes such as accessibility to outside capital, political sensitivity, balance sheet quality, and the diffusion of ownership can also explain bank managers' decisions with respect to the accounting and economic choices examined in this study. A unique characteristic of the Japanese banking industry provides an interesting setting where I partition sample banks based on ownership structure. I show that keiretsu membership and level of block shareholdings affect bank managers' method choices. I also examine a portfolio of bank managers' choices that can improve banks' capital ratios and find bank characteristics are significantly different between banks that revalued their real estate and those that switched their securities valuation methods to historical cost. I find the banks that adopt accounting methods to improve their capital ratio have less access to outside capital and in fact adopt cosmetic accounting methods instead of making real economic choices such as issuing subordinated debt or taking on additional equity capital.