The latest in the Sasin Research Seminar series was a dual presentation of a work in progress by Sasin’s Professor Dr. Pattarake Sarajoti and Sasin’s Visiting Professor Dr. Piman Limpaphayom. The talk began by looking at a 1958 paper by Modigliani and Miller called ‘Capital Structure Irrelevance Theorem’, which argued that in a perfect capital market, no one needs to study finance. However, for finance to be irrelevant, there needs to be no corporate or personal tax, no bankruptcy cost, no agency conflict, and no information asymmetry. In the real world, conditions are different, and the markets have several imperfections. This is why finance remains important and is still studied. Japan is the world’s third-largest economy based on GDP and has a very high GDP density. The history of how this came about was examined, starting with Japan getting levelled in World War Two and having to rebuild. Then, in the 50s, Japanese economists made plans to ensure markets would be more resilient in the future. They realized that the USA succeeded due to its large automobile industry. Japan has no iron or steel, so they signed several 100-year contracts with countries like Australia. They did the same with the Saudis to obtain oil. They then started industries. Next, they designed the ‘keiretsu’ system, where companies are strategically placed into corporate groupings. Six major industrial groups were listed, and banks funnelled money to them. In the system, cross-holding ensures stability and long-term horizons. Cross-share-holding strategies were discussed, along with their long-term benefits. This was followed by Mitsubishi’s horizontal keiretsu layout, where everyone holds each other’s shares, and the CEOs meet in private. The banks own shares in the companies they lend to, which means the lenders are close to firms and sit on their boards. The result is that if one of the firms in the group is struggling and is beneficial long term, all firms in the group will help. This is known as the convoy system, and while this has advantages, firms are only as strong as the weakest link. Japan has been in recession for 25 years, which wouldn’t be tolerated elsewhere. Interestingly, the impact of Keiretsu Corporate Structure on financial decisions found low corporate or personal tax, low bankruptcy cost, low agency conflict, and low information asymmetry. This is similar to the Modigliani and Miller model. Next to be discussed was ‘Japan’s Lost Decade’. This was a major financial and economic crisis at the start of the 90s, which saw asset bubble collapse, both in securities and property values, and led to intervention by the DICJ. Then came the three hypotheses the paper aimed to answer, along with an explanation of the background. H1: There should be a positive relationship between keiretsu memberships and capital investment in the real estate industry. H2 There should be a smaller relationship between the level of internally generated cash flow and capital investment decision by keiretsu firms than for independent firms. H3 Keiretsu firms use less financial leverage during the period of economic slowdown. The data came from 788 Japanese real-estate corporations listed on the Tokyo Stock Exchange during 1980-2019, including 764 independent and 24 member firms. The data and findings were then discussed with a variety of parameters examined. For example, there were comparisons between Keiretsu and non-Keiretsu in pre-bubble and post-bubble periods, and factors included CAPEX, leverage, ROA, Tobin’s q, size, debt, cashflow, and growth. This was followed by a look at regression results. The paper found a positive relationship between financial leverage and keiretsu status – but with lower financial leverage during economic slowdowns. In addition, real estate keiretsu firms have larger capital investments than independent firms, even during economic stagnation. Although keiretsu firms tend to have a lower level of profitability, they tend to perform better, as measured by ROA and Tobin’s q, than independent firms during the post-bubble period. The lecture ended with a Q&A session that explored the differences between industry sectors, keiretsu characteristics found in other countries, attitudes to large corporate control, and potential conflicts of interest among the companies involved.