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Yoshiro Miwa & J. Mark Ramseyer, The Value of Prominent Directors: Corporate Governance and Bank Access in Transitional Japan, 31 J. Legal Stud. 273 (2002).

Abstract: Although observers urge transitional economies to rely on banks rather than stock markets, in early twentieth‐century Japan, large firms did not rely on debt. Instead, they sold stock. To mitigate agency slack, they sometimes recruited prominent investors to their boards. In this context, we use data on cotton‐spinning firms to explore the relationship between board composition and profitability. First, firms that hired prominent directors had higher profits in succeeding years. We hypothesize that these directors brought monitoring skills and certifying credibility: they knew what to expect, knew when and how to intervene, and had the reputations necessary to certify firm quality credibly. Second, firms did not further increase their profitability by appointing directors with access to a bank or to spinning technology. We conclude that the firms probably had access to funds and technological assistance without board connections.