EQUITY OWNERSHIP AND THE DETERMINATION OF MANAGERS BONUSES IN JAPANESE FIRMS

This paper empirically analyzes the relationship between ownership str ucture and the determination of managers' bonuses in Japanese firms. I n the analysis, we obtain two notable findings. First, equity ownershi p by non-financial corporations increases the sensitivity of managers' bonuses to firms' profits. Second, equity ownership by financial inst itutions increases the magnitude of bonus cuts in times of firms' dist ress. These findings suggest that cross shareholdings effectively tran sfer residual claims from shareholders to managers. They also suggest that, when firms are performing badly, financial institutions interven e in management and deprive managers of residual claims. Our empirical results imply the existence of two complementary managerial incentive mechanisms in Japan, which may substitute for external takeover threa ts. (C) 1998 Elsevier Science B.V.