Monetary and Economic Studies Vol.27 / November 2009

Part-Paid Stock, Corporate Finance, and Investment: Economic Consequences of the Part-Paid Stock System and Supplementary Installments in Early 1930s 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 Period to make it easier for investors to buy company shares and promote capital concentration. Company directors determined the amount of supplementary installments on part-paid stocks and when the installments were paid. The installments functioned as a last resort for corporate fundraising in times of financial distress. Studies of historical documents show that in the early 1930s during the Great Depression, many companies raised funds through supplementary installments, applying the funds to make investments and repay debts. We construct a new corporate financial dataset with data on supplementary installments encompassing 174 firms, and estimate cross-sectional investment functions for fiscal 1932. Regression results suggest that while corporate investments were subject to liquidity and debt constraints, supplementary installments stabilized corporate cash management and promoted orporate investment.

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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