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Observers of the formerly communist economies urge firms there to obtain funds from a relatively few sources. They note the problems the firms face: dysfunctional courts, markets, and statutes. Because these firms cannot rely on the courts to discipline managers, they predict that firms will do best if they raise their capital only from a few sources. Firms in Japan at the close of the nineteenth century similarly faced dysfunctional courts, markets, and statutes. Yet the firms that succeeded in Japan were not the ones that took the tack proposed by modern observers. They were the ones that used little debt and raised their equity from a large number of investors. In this article we outline how concentrated finance can introduce problems potentially as severe as the ones it mitigates and discuss why dispersed equity did not reduce firm efficiency in late-nineteenth-century Japan.

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Masahiko Aoki

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Hyung-Ki Kim

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