KEIRETSU NETWORKS AND CORPORATE PERFORMANCE IN JAPAN

Using data on 197 large Japanese firms over a 24-year period, we study how profitability is affected by firm integration in big-six horizont al keiretsu networks. Combining measures of financial and commercial d ependence on a keiretsu group with the governance ties of equity owner ship, director transfers, and shacho-kai (presidents' council) members hip, we replicate previous studies showing that group firms have lower average profitability than independents. Such findings, however, cann ot be taken at face value, because the group effect varies with the pr ior performance of the firm. Weak companies benefit from group affilia tion (they recover faster), while strong ones do not (they are subsequ ently outperformed by independent firms). Thus, there is much less var iability in the performance of keiretsu firms as compared with indepen dents. However, this redistribution effect decays in the second half o f the 1980's during a period spanning deep structural changes in the J apanese economy Before then the effect is evident for all five measure s of firm ties to big-six keiretsu groups. Yet one such tie, shacho-ka i membership, distinctively shapes the intervention process. Shacho-ka i standing appears to be a near-sufficient condition for redistributio n. For shacho-kai firms, ad hoc business and governance ties (with one exception) add nothing to the odds of intervention. For firms lacking shacho-kai seats, however ad hoc ties strongly condition those odds. Moreover, redistribution is a pervasive and continuous process that to uches all shacho-kai participants. When the intervention target is an independent firm, by contrast, the redistribution process affects the weakest and the strongest group members; average performers are left a lone. These and other findings, we argue, run counter to a simple main bank model of keiretsu organization and action, and favor instead a m odel of the big-six groups as complex network structures.