Financial Structure and Bankruptcy Risk in Japanese Companies
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As the world's financial markets become more internationalized, the capital markets and corporations of Japan assume an increasingly important role. But financial practices and institutional relationships unique to Japan pose major obstacles to the foreigner'sunderstanding. Of particular concern to lenders andinvestors abroadis the extremely high financial leverage of Japanese companies. By measures of financial soundness traditionally used in western countries, risk exposures almost inconceivable elsewhere prevail in Japanese business finance. It is common, for example, for borrowed funds to exceed owners' equity by a multiple of five or six times.' Figure 1 illustrates the declining trend of equity ratios (equity/total assets) among listed Japanese companies since the end of World WarII. Table 1 contrasts Japanese equity ratios with those of other industrialized nations.2 Similarly high risk complexions are suggested by other financial statement measures such as interest coverage and cash flow coverage. * SadahikoSuzuki is AssociateProfessorof Finance at Keio BusinessSchool, Tokyo. He is an authority on Japanesecorporatefinance. ** RichardW. Wrightis Professorof InternationalBusinesson the Faculty of Management, McGillUniversity.Hehas publishedwidely in internationalbusinessmanagement and Japanesebusiness. Date Received: December 22, 1982;Revised: July 25, 1983/January 27,1984; Accepted: February, 28, 1984. The authors acknowledge with gratitude the cooperation and support of Nomura Research Institute, Japan.
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JOURNAL OF INTERNATIONAL BUSINESS STUDIES, SPRING 1985
FIGURE1 AverageEquity Ratiosof MajorJapaneseCompanies 40-
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FISCALYEAR Source: Ministryof InternationalTradeand Industry,WagakuniKigyonoKeieiBunksei (Analysisof JapaneseCorporation),1981. Note: Equity ratio = Equity+ total assets TABLE1 Equity Ratios by Country Country japan (103 firms average) United States (177 firms average) Canada (15 firms average) United Kingdom (38 firms average) West Germany (25 firms average) France (21 firms average) Italy (7 firms average) Netherlands (3 firms average) Belgium (3 firms average) Switzerland (6 firms average) Sweden (11 firms average)
1977
1978
21.77% 49.92 46.59 42.05 28.59 24.99 22.90 40.17 30.55 49.68 25.69
22.86% 49.40 45.13 41.87 28.92 26.80 26.31 40.18 30.81 50.88 25.66
Source:
Ministry of International Trade and Industry, Sekai no Kigyo no Keiei Bunseki (International Comparison of Management), 1980, pp. 84-87.
Note:
Weighted averages
FINANCIAL STRUCTURE AND B
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