Discussion Paper Series 2009-E-22

Part-Paid Stock, Corporate Finance, and Investment: Economic Consequences of the Part-Paid Stock System and Supplementary Installments in the Early 1930s of Japan

Takashi Nanjo, Makoto Kasuya

Under Japan's prewar capital stock system of joint-stock companies, rather than paying the full face value of a share in one lump sum, shareholders paid for stocks in multiple installments. This system was transplanted from industrialized Western nations during the Meiji Era to make it easier for investors to buy company shares and to promote capital concentrations. Company directors determined the amount of supplementary installments on part-paid stocks and when these installments were paid. The Commercial Code and Corporate articles of association specified sanctions for nonpayment, giving companies the backing needed to call in supplementary installments. Supplementary installments functioned as a last resort for corporate fund-raising in times of financial distress and played a role in corporate cash management and investment. Studies of historical documents such as financial statements and company histories show that in the early 1930s of the Great Depression, in a time of tight financial markets, many companies raised funds through supplementary installments, applying these funds to make investments and repay debts. As part of our study, we construct a new corporate financial data set with data on supplementary installments encompassing 174 firms, based on the Mitsubishi Economic Research Institute's Honpo Jigyo-Seiseki Bunseki (Performance analysis of Japanese companies) and Toyo Keizai's Kabushiki Gaisha Nenkan (Company Year Book) and estimate cross-sectional investment functions for the fiscal year of 1932. Regression results suggest that while corporate investments were subject to liquidity and debt constraints, supplementary installments stabilized corporate cash management and promoted corporate investment activities.

Keywords: part-paid stock; joint-stock company; corporate finance; investment; financial system; interwar period; Great Depression

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2009 Bank of Japan All Rights Reserved.

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