Kubo-Saito - ”Japanese Honors System and Incentives for Presidents”

Abstract: Career concern can mitigate agency problem between directors and shareholders. In thispaper, we extend source of career concern to non-financial incentive: honors conferredby government. Using data on a large sample of presidents of Japanese firms, weexamine the determinants and effect of honors conferred by government. We find that presidents’ probability of winning an order is positively related with his accounting performance. Other firm characteristics, such as ex-bureaucrats on board, prosecution by Fair Trade Commission, are found to affect the probability. There is a positive and significant relationship between ranks of orders and firm size in terms of market share and sales. Presidents may want to maximize sales, rather than shareholders’ return to win higher honor. We also argue that concern for future honor affect pay-performance sensitivity. We find that financial incentive is weaker for those who are more likely to
receive higher honors.

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