212 S. Drucker and M. Puri
5.1. Japan
Japan and the United States have similar regulatory histories regarding the ability of
commercial banks to underwrite securities. In Japan, commercial banks were allowed
to underwrite securities until 1948. However, much like the Glass–Steagall Act in the
United States, Article 65 of the Securities and Exchange Act of 1948 effectively pro-
hibited commercial banks from running securities businesses. The Financial System
Reform Act of 1992, which came into effect in 1993, allowed commercial banks to
again underwrite securities through subsidiaries, and in a short period of time, commer-
cial banks gained significant market share in corporate bond underwriting.^20 Despite
the similarities in their regulatory histories, as opposed to banks in the United States,
Japanese commercial banks have historically operated in a main bank system where
banking relationships are strong and long-term.^21 Therefore, the trade-offs between con-
flicts of interest and certification should be pronounced in Japan, and there is likely to
be a strong impact of existing banking relationships on competition for underwriting
mandates.
Konishi (2002)examines the pricing and long-term default performance of industrial
bonds underwritten by commercial banks as compared with investment banks during
the pre-war period in Japan (January 1919–December 1927). Using the same frame-
work to examine ex-ante pricing as inPuri (1996), the author finds no difference in
the yields of commercial bank-underwritten and investment bank-underwritten bonds,
consistent with conflicts of interest not dominating the certification effect. To examine
long-term default performance,Konishi (2002)followsPuri (1994)and calculates cu-
mulative mortality rates as well as uses a probit model to estimate if the probability
of default is influenced by bank underwriting, after controlling for other important fac-
tors. The results of the mortality analysis indicate that commercial bank-underwritten
issues default significantly less often than investment bank issues at time horizons from
three to seven years after issuance. Further, the probit analysis of default probability
also shows that commercial bank issues are significantly less likely to default. Together,
these results suggest that conflicts of interest were not a problem when banks under-
wrote public securities in pre-war Japan, which is consistent with the evidence from the
pre-Glass–Steagall period in the United States.
There are three papers that study the pricing of industrial bonds in Japan after the
Financial Systems Reform Act, comparing commercial bank and investment bank is-
sues. In each of these papers, the authors identify if the underwriter has an outstanding
loan to the issuer and also if the underwriter owns shares in the firm. As inGande et al.
(1997), Roten and Mullineaux (2002), and Schenone (2004), the identification of these
prior relationships allows for a richer testing ground. These papers are byHamao and
Hoshi (2002), Takaoka and McKenzie (2006)andLiu and Kang (2004). In examining
(^20) SeeHoshi and Kashyap (1999)for more details on financial deregulation in Japan and its consequences.
(^21) SeeHoshi (1996)for a discussion of main bank relationships and universal banking in Japan.