On 7/8 January, the Tokyo Center for Economic Research (TCER), the National Bureau of Economic Research (NBER) and CEPR held a joint conference in Tokyo on `Corporate Finance and Related Issues: Comparative Perspectives'. This was second annual CEPR/NBER/TCER collaboration. The proceedings of the first, held in January 1989 on `Labour Relations and the Firm: Comparative Perspectives', have been published as the December 1989 Journal of the Japanese and International Economies (Academic Press, ISSN 0889-1583, vol. 3, no. 4).

The 1990 conference was organized by Takatoshi Ito (Hitotsubashi University, NBER and TCER) and Kazuo Ueda (University of Tokyo and TCER). The proceedings will be published as the December 1990 issue of the Journal of the Japanese and International Economies. The CEPR contributions to the conference all drew on work conducted under the auspices of the Centre's `International Study of the Financing of Industry'. This five-nation comparative project is directed by Professor Colin Mayer, Co-Director of CEPR's Applied Microeconomics programme area.
In his paper, Tim Jenkinson (Keble College, Oxford, and CEPR) presented the results of research on `Initial Public Offerings in the UK, USA and Japan'. In all three countries, new equity issues are priced systematically lower than the price that prevails once trading in the shares begins. Jenkinson used new data from a large sample of firms that entered these three stock markets during the period 1985-8. On the US market, initial public offerings rose relative to the market by around 10% by the end of the first week, rather less underpricing than found by previous studies; large issues were priced with significantly more accuracy than small issues. Initial offerings on the London Stock Exchange were on average underpriced by 7%, excluding a distinct `hot issue' period between Big Bang in autumn 1986 and the Crash in 1987, during which underpricing averaged 25%. Underpricing of Japanese initial offerings was very high, according to Jenkinson, averaging 55% during 1986-8.
No single theory seemed able to explain this pattern of underpricing. This is not surprising, Jenkinson argued, as underwriters have a large degree of discretion in setting the issue price and can be influenced by many factors, including minimizing risk and preserving their own reputation, as well as maximizing receipts for the issuing firm. He found little empirical support for signalling theories of underpricing or of the `winner's curse' model; there was limited evidence, from the UK data only, that the extent of underpricing was related to the degree of ex ante uncertainty concerning firms' true value.
Colin Mayer (City University Business School and CEPR) presented a paper with Ian Alexander (CUBS) on `Banks and Securities Markets: Corporate Financing in Germany and the UK'. In Germany, banks have close relations with their corporate customers, often having equity participations and seats on their supervisory bodies. In the United Kingdom such arrangements are rare, and the relationship between banks and borrowing firms is distant. Mayer and Alexander focused on the financing of large and medium-sized firms in the two countries. In aggregate, the financing of German and UK firms is similar, with heavy reliance on retentions, little use of equity markets and most external finance obtained from banks. The authors found, however, that the aggregate numbers hid important differences. Large UK firms pay out significantly more of their earnings as dividends than large German corporations and raise more medium- and long-term finance. Medium-sized UK firms raise more equity finance than their German counterparts, pay out more of their earnings as dividends and make less use of bank finance, with long-term lending to medium-sized UK corporations comparatively uncommon.
A number of theories failed to explain these patterns. Taxation and signalling hypotheses could not explain relatively high dividend pay-outs in the United Kingdom. `Pecking-order' theories of preferred forms of finance were contradicted by differences in financing patterns between large and medium-sized firms, while models of asymmetric information implied that there should be more bank lending to large German than UK firms. Mayer and Alexander advanced a different explanation, highlighting differences in the way the corporate sectors are controlled in the two countries. Large German firms have a large degree of autonomy because banks afford protection from hostile takeover bids. Though this has allowed more long-term bank lending than would otherwise have been the case, it has also restricted access to equity markets by medium-sized firms. It may also have impeded the growth of venture capital markets in Germany.
The paper by Jenny Corbett (St Antony's College, Oxford, and CEPR) examined `Patterns of Finance and Government Lending to Industry in Japan'. Careful comparisons of different data sources suggested that Japanese corporations have relied more than is generally thought on internally generated investment funds. As in other countries, small and medium-sized firms rely more on bank finance than large firms, which use a higher proportion of internally generated funds and resort more to capital markets. Despite a common view that Japanese corporations are moving away from bank finance, Corbett noted that small and medium-sized firms are increasing the proportion of bank finance in investment funds, while large firms are tending to replace bank finance with internal rather than capital market funding.
The role of state-owned financial institutions in the Japanese investment market has been the subject of considerable debate, with some arguing that they are increasingly competing with private institutions for good investment projects. Corbett divided her data into firms which had borrowed from the Japan Development Bank during 1981-5 and a group that did not. Both sub-samples in aggregate conformed to the pattern of finance described above. She found significant differences between the two groups: the companies that did borrow from the JDB were carrying out more physical investment per unit of internally generated funds than were the others. They also used a higher proportion of net bank credit in total funds raised. These observations appear consistent, Corbett suggested, with the view that borrowing from the JDB was not competing with private finance, but made possible extra investment.

Other papers presented at the conference were:
`Determinants of Cross-Border Equity Investment: Evidence for the US and Japan', by James Poterba (MIT and NBER) and Kenneth French (University of Chicago and NBER)
`Evidence on Q and Investment for Japanese Firms', by Takeo Hoshi (University of California at San Diego) and Anil Kashyap (Federal Reserve Board)
`Changing Japanese Corporate Financial Structure', by John Y Campbell (Princeton University and NBER) and Yasushi Hamao (University of California at San Diego)
`Economies of Scope in the Banking Sector', by Toshiaki Tachibanaki (Kyoto University and TCER)
`Are Japanese Stock Prices Too High?', by Kazuo Ueda
`Ex-Dividend Day Behavior of Japanese Stock Prices', by Ravi Jagannathan (University of Minnesota) and Fumio Hayashi (University of Pennsylvania and NBER)
`The Cost of Capital in Japan: Recent Evidence and Further Results', by Alan Auerbach and Albert Ando (University of Pennsylvania and NBER)