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\begin{center}
\begin{LARGE}{\bf 
Executive Compensation in Japan:\\
Estimating Levels and Determinants from Tax Records}
\end{LARGE}

\bigskip

February 14, 2011 (Forthcoming, 2011, {\it Journal of Economics and Management Strategy}\\

\bigskip

Minoru Nakazato, 
J. Mark Ramseyer, and 
Eric B. Rasmusen\\
 

\bigskip




\noindent
*Minoru Nakazato is Professor of Law (Taxation and Law \&
Economics), University of Tokyo,Bunkyo-ku, Tokyo
\url{nakazato@j.u-tokyo.ac.jp}.\\
  J. Mark Ramseyer is the
Mitsubishi Professor of Japanese Legal Studies, Harvard Law
School, Cambridge, MA 02138
\url{ramseyer@law.harvard.edu}.\\
  Eric B. Rasmusen is the Dan R. \& Catherine M. Dalton
Professor, Kelley School of Business, Indiana University,  IN 47405 
\url{erasmuse@indiana.edu}. 

 We
gladly acknowledge the generous financial assistance of the East
Asian Legal Studies Program and the John M. Olin Center for
Law, Economics \& Business at the Harvard Law School.  We
received helpful advice and suggestions from Nina Baranchuk,
Jesse Fried, Takeshi Fujitani, Tsuyoshi Ito, Steven Kaplan,
Yoshihisa Masaki, Zen'ichi Shishido, Masao Yoshimura, and
workshop participants at UCLA, Columbia, Illinois, GRIPS,
Harvard, the University of Tokyo, and the University of
Washington.  Copies of the latest draft and   the
datasets and STATA ``do'' files may be found via \url{
http://www.rasmusen.org/papers/exec/exec.htm.}




\newpage


  Abstract
\end{center}

	 Most studies of executive compensation have data on pay
but not total income. Because exchange-listed Japanese firms
(unlike exchange-listed U.S. firms) need not disclose executive
compensation figures in their securities filings, most studies on
Japan lack even good data on pay.  Through 2004, however, the
Japanese tax office disclosed the tax liabilities of the 73,000
Japanese with the highest incomes.  We obtained this data, and
match the high-tax list against the list of CEOs of the firms listed
on Section 1 of the Tokyo Stock Exchange.  We thus estimate
salaries and risk exposure in a new way. We confirm survey and
anecdotal evidence that Japanese executives earn less than
American--- about one-fifth the pay, adjusting for firm size and
outside income. Tobit regressions show that pay in Japan depends
heavily on firm size (a .22 elasticity) and on accounting
profitability, but not on stock returns.  Additionally, family-owned
firms and those with large lead shareholders pay less to employee
CEOs not in the family or with large shareholdings, as do firms
whose directors have less tenure on the board.

 
\newpage

 \noindent
{\bf 1. Introduction} 

    Most studies of executive pay use the data from regulatory
filings by American firms compiled in ExecuComp, as detailed in
Cadman, Klasa, and Matsunaga (2010).  This paper differs in two
ways.  First, we look at executives in Japan, a country whose
executive pay is much less studied because corporations need not
report the pay level to government regulators.  Even reliable
information on the average level of pay in Japan has been hard to
come by, much less information that can be used to study its
determinants.   Second, we look at executive income, not just the
pay executives obtain from the corporation.

   Publicly traded corporations in the United States must disclose
not only financial accounting data but also detailed information on
the pay of top executives, including how it breaks down into
salary, options, and bonus.  Since this is a disclosure requirement
for the company and not the executive, it fails to include anything
about the executive’s income from other sources.  Regulatory
filings in Japan lack even this data---all that need be disclosed is
the compensation of the board of directors in aggregate.

	Our data consist of the income tax paid by the richest
executives in Japan in 2004, plus company data from the securities
filings of the publicly traded firms for which they work.  The tax
forms themselves are confidential, but until recently the Japanese
government disclosed the identity and total tax bill of anyone
paying over 10 million yen in taxes -- some 578 corporate
presidents in 2004.  We also have financial data on the companies
for which they worked, and personal and company information on
813 other presidents whose tax bills we know must be less than 10
million yen (since they do not appear on the government list).  We
thus have a measure of an executive’s total income from all
sources.




	The best-known comparison between American and Japanese
executives is Kaplan (1994), which is limited to the largest 121
companies in Japan and takes as its data for CEO pay the mean
amount  paid to the on-average 22 members of the board of
directors (the only compensation number that Japanese
corporations must report).  John (1999) also looks at average
board compensation, but for 796 firms from 1968 to 1992.
Japanese boards have fewer outside members than American
boards, but given the size of the boards and the fact that many
members work only part time, the aggregate compensation
measure is a rough guide to the pay of the CEO.  Furthermore, as
Kato (1997) tells us, even this reporting requirement can exempt
substantial cash compensation to executives. Other studies of
Japanese executive pay, such as Abowd \& Bognanno (1995), Xu
(1997) and Kato \& Kubo (2006), use data from surveys by
management consulting firms.  Although this data can be very rich
(Kato \& Kubo tracks 51 firms for 10 years), the selection of
companies is nonrandom and samples are small.

	Two studies, Kato \& Rockel (1992) (on executive pay) and
Kato (1997) (on the effect of belonging to a ``keiretsu''), use the
same tax-reporting data source that we do, but use the tax paid by
599 managers in 1985 instead of our 2004 data.   A third study,
Basu, Hwang, Mitsudome \& Weintrop (2007) (on executive pay)
uses four years of tax data on 174 firms from 1992 to 1996.

Those studies use smaller samples and older data, and do not
adjust for the presence of entrepreneurial executives with sizeable
capital income.  Moreover, they ignore the truncation and
selection problems caused by the tax data’s minimum tax
requirement (that an observation with a large negative disturbance
will drop out of the tax dataset).  By contrast, we adjust for these
problems and simultaneously incorporate information about
executives earning less than the tax reporting threshold by using
tobit instead of ordinary least squares. This is also the approach we take in Nakazato, Ramseyer, and Rasmusen (2009), which, however, focusses on the difference between the pay of executives in private and public corporations. 
 

	 To preview our findings: Japanese executive incomes are
about one third of U.S. executive compensation. Adjusting for the
fact that our income figure includes capital income and for firm
size, we estimate that Japanese executive compensation is closer
to one fifth that in the United States.   This finding is important in
itself, because previous estimates have been anecdotal or based on
limited surveys.  We also find that as in studies of U.S. executives,
the most important determinant of pay is the size of the company.
CEO income rises at 21\% the rate of asset size, compared to rates
around 30\% others have found for the U.S.   and do not depend
on average asset size of companies in the same industry.  Pay also
depends on accounting profitability, but not on stock price
changes  or profitability relative to the industry mean. Family
companies, those with concentrated ownership and those with
older directors pay less, while those with directors who have been
on the board longer pay more.

\bigskip \noindent
{\bf     2.  The Data}

  Since we view the organization of a new dataset for executive
pay as a major contribution of this paper, we begin by describing
the data in some detail. Impatient readers who are willing to take
the quality of the data on faith can skip to Section III.

\bigskip \noindent
{\bf     2.1.  The Executive Tax Data}

	Government filing requirements give the researcher plentiful
data about the characteristics of large public firms in both Japan
and the United States.  Unlike American companies, however,
Japanese companies need not disclose how much they pay their
executives.  Instead, the law requires only that they disclose the
total amounts they pay all members of the board of directors
together.  The kind of government data used for studies of U.S.
executive pay is unavailable for Japan.

	Instead, we turn to data based on individual tax returns.
These data are not provided by the employers, but by the
executives to the tax office, which through 2004 (but not
afterwards) published the names, addresses, and tax liabilities of
taxpayers who reported high enough incomes.\footnote{  For a brief period some 80 years ago, the United States also
required tax bills to be published.  See Kornhauser (2005).}  The tax threshold
that triggered public disclosure varied over the years, but in 2004
it was 10 million yen (about \$97,000 in taxes at the end-of-2004
exchange rate of 102 yen/\$).  Japanese taxpayers pay a tax of 37
percent on ordinary income beyond 18 million yen.\footnote{   Shotoku zei ho [Income Tax Act], Law No. 33 of 1965, Sec.
89, as amended by Shotokuzeito futan keigen sochi ho [Act for
Measures to Reduce the Burden of the Income and Other Taxes],
Law No. 8 of 1999, as amended by Law No. 21 of 2005.}  For a crude
approximation of income, you may simply divide the tax liability
by .37.  In Appendix I,  we og into more detail about tax law  and taxable income as a proxy for income.  Table 1 illustrates a more precise approach by using the 
standard deductions and credits to calculate actual income that
would generate 10 million yen in taxes.  By this approach, to owe
the median tax bill of 10.5 million yen for executives from the top
100 firms (see Table 3 later in the paper), a CEO would need to make 41 million
yen (\$401 thousand).  By the crude approach, he would need 28
million yen (\$276 thousand).

  


Insert Table 1 here

 

		In 2004, some 73,000 Japanese paid 10 million yen or
more in taxes, a small number of very rich people compared with
the United States. Japan has about half the population of the
United States and roughly the same median household income.
Yet in 2003, U.S. taxpayers filed 536,000 returns with adjusted
gross incomes over \$500,000, and nearly 181,000 returns with
incomes over \$1,000,000 (\url{http://www.irs.gov}).  According to
Piketty \& Saez (2006), the contrast is largely a function of the
increasing dispersion of income in the U.S. since the mid-1980s.

	Although the tax bills of the wealthy in Japan were public
information, the government did not provide the data in
convenient form.  We therefore obtained our tax data from the
Japanese affiliate of the D\&B credit-rating service, Tokyo shoko
risaachi (TSR, 2005), which uses the data for credit reports.  In
some cases, TSR added the professional affiliation of the
taxpayers, in which case we generally followed its identification.

	Starting in 2006, tax liabilities have become confidential.
Under the newly passed Personal Information Protection Act, the
government may not release a variety of private data, including tax
liabilities.\footnote{  Kojin joho no hogo ni kansuru horitsu [Act Relating to the
Protection of Personal Information], Law No. 57 of 2003.}  Our 2004 dataset thus represents the last available
installment for academic studies.






	Because many executives even of very large companies pay
less than 10 million yen in taxes, we do not have tax data on all
executives.  Our dataset is censored at the lower levels. Others
using this data to estimate Japanese executive compensation
(Kato \& Rockel, 1992; Kato, 1997) have limited their studies to
those executives who pay more than 10 million yen in taxes.  This
has three problems.  First, the results do not necessarily apply to
large companies which pay their executives lower salaries -- there
is selection for companies with a policy of paying high salaries.
Second, ordinary least squares and other linear estimators are
biased because observations with negative disturbances are more
likely to result in incomes below the threshold and drop out of the
dataset.  A technique should be used that takes into account this
censoring.  Third, not all available information is used if the study
is limited to executives paying over the threshold.  Although we
do not know the exact incomes of the executives not in the tax
dataset, we do know something about those incomes:  they
resulted in less than 10 million yen in tax.  This is relevant
information, and we have just as good information on
characteristics such as age and company size for low-tax
executives as for high-tax ones.  Thus, we use the full dataset---
selecting on the exogenous variable of stock exchange listing
category-- and employ tobit, the standard technique for censored
data.

  

 

\bigskip \noindent
{\bf     2.2. Corporate Financial and Governance Data}

	The executives in our sample are the highest-paid employees
of firms listed on Section 1 of the Tokyo Stock Exchange.  In
general, these firms are the very largest publicly traded firms in
Japan.  Because banks differ from other firms in a variety of ways
-- particularly in how their accounting figures are to be
interpreted--- we exclude them.  This leaves us with a database of
1,568 executives and firms, summary statistics for which are
shown in Table 2.

	We obtained most of our financial data on the firms from
Nihon keizai shimbunsha (2005) and Toyo keizai shimpo sha
(2005b).  We incorporated stock price data from Toyo keizai
shimpo sha (2005a), and obtained the identity of the executives
and the composition of the boards in 2004 from Toyo keizai
shimpo sha (2005d), which took the information from securities
filings.  Because firms generally list board members in order of
importance, we collected information on the first two members
listed, often but not always the president (shacho) and chairman
of the board (kaicho).

                                     					   Insert Table 2
here


\bigskip \noindent
{\bf   3.  How High Is Executive Income in Japan? }

  \noindent
{\bf   3.1.  Levels of Income} 

   In 2004, the highest paid CEO in the Forbes 500, Terry Semel
of Yahoo, earned total compensation of \$230.5 million, of which
salary plus bonus was only \$0.6 million and the rest was almost
entirely capital gains.  The 50th ranked earned \$23.8 million,
including \$2.5 million in salary plus bonus, and the 250th earned
\$4.7 million, also with \$2.5 million in salary plus bonus.\footnote{   ``CEO Compensation,'' Forbes online edited by Scott
DeCarlo, April 21, 2005,
\url{http://www.forbes.com/2005/04/20/05ceoland.html.}}


 


	The highest paid corporate executive in Japan, Tadashi Yanai
of Fast Retailing (holder of the Uniqlo clothing brand), paid taxes
of \$10.6 million in 2004, implying the taxable income of \$30
million shown in Table 3.  In America, 39 CEOs had
compensation over \$30 million.  Reflecting the flatter income
distribution in Japan, only two Japanese taxpayers in any walk of
life earned more than Mr. Yanai.  From the high end, incomes fall
rapidly.  The 5th highest paid executive in Japan earned only half
Yanai’s income, the 10th highest earned a third, and the 20th
highest barely a fifth.  Only 20 executives, and only 224 Japanese
taxpayers in any endeavor earned over \$6 million, whereas the pay
of 211 corporate CEOs’ in America exceeded that amount.\footnote{   Keep in mind that being a CEO is not the only highly paid
job in the business world.  In Japan, as in the United States, other
positions in finance-related industries can be even more lucrative.
The top taxpayer on the TSR list is Tatsuro Kiyohara, of Tower
Investment, whose tax of 36.9 million yen was three times the tax
of the highest-paid CEO.}

 

												Insert
Table 3 here

	As Table 3 shows, in the largest 100 non-bank firms in
Japan the median highest paid officer earned \$610,000; in the
largest 500 firms, he earned \$542,000; and in all firms he earned
\$401,000 (because these amounts include investment income, in
Table IV below we estimate a lower bound for the compensation
component).\footnote{   Several readers of earlier drafts asked how anyone could
live in Tokyo on these salaries.  The cost of living is indeed high
in Tokyo, but it is high in New York too.  According to one study
(www.finfacts.com/costofliving.html, accessed Apr. 25, 2007), in
2006 the cost of living in Tokyo was just 19.1\% higher than in
New York.  The western stereotype of stratospheric Tokyo prices
are driven by the prices in the ex-patriate ghettos.  In fact, even
university professors live comfortably in Tokyo.}





	Figure 1 shows the distribution of taxes paid between 10
million and 50 million yen, which includes 504 of the 593
presidents with taxes over 10 million.  The distribution is
declining and convex with a long right tail, the power law
distribution so typical of achievement.

    Insert Figure 1 here

	Comparing the median American and Japanese CEO figures
for the top 500 firms, it seems that the Americans earn 8.7 times
as much as the Japanese (= 4.7/.542).  This is misleading,
however, for two reasons.

	First, within any country big companies pay more than small
ones.  American corporations are larger than Japanese firms, so
picking the top 500 in each country skews the comparison.  The
75th Japanese size percentile in our data had assets of 242 billion
yen (\$2.3 billion).  Within the 192 to 292 billion yen range (\$1.87
to 2.85 billion) our dataset contains 104 Japanese firms.  Because
49 percent of their presidents were on the high-tax list, they had a
median income of about 40 million yen (\$400,000).  Within the
same size range of \$1.87 to 2.85 billion, the COMPUSTAT
database contains 151 U.S. firms. Their CEOs had a median total
current compensation of just \$1.5 million, not the \$4.7 million of
the Forbes 500.  Thus, adjusting for size we would conclude that
American executives earned 3.75 times as much as Japanese (=
1.5/.4).

	Second, our Japanese data is for income, but our U.S. data is
for total compensation, as we will next discuss.

\bigskip 

\noindent
{\bf     3.2.  Labor versus Investment Income: Capitalists and Company
Men}

	   Executives have both labor and capital income.  Studies of
American executives can identify only labor income; our study of
Japanese executives can identify only total income. This confuses
comparison of  the American and Japanese data.

 	We therefore divide our executives into Capitalists and
Company Men.  The former both own and manage firms.  They
thus earn substantial capital income only weakly related to their
compensation as executives.  The latter earn less capital income
and, as a result, have total income more closely correlated to their
labor income.  We define a Capitalist as one of the 402 corporate
presidents who either is one of the top ten shareholders of the firm
(of which there are 273), or who serves at his family firm as
defined in the Appendix (there are 229 such executives, with 110
of those also being  top-ten shareholders). (We explore alternative
definitions of Capitalist in Section V.b, below.)  The minimum
value of the shareholding of executives in the top ten is  813,440
thousand yen, equal to about 7.98 million dollars at the exchange
rate of 102 yen/dollar. We lack information on shareholdings
below the top ten.

	Capitalists thus defined do indeed report higher incomes than
Company Men.  As illustrated in Table 4, the median Capitalist
paid 57 million yen in taxes.  Only 37 percent paid less than 10
million, while over 12 percent paid more than 70 million.  By
contrast, the median Company Man paid less than 10 million yen,
and less than 1 percent (6 executives) paid more than 70 million.


	 According to the aggregate data in Table 3, the median
president of the 100 largest firms paid taxes of 15.3 million yen---
suggesting a median income of about 534 thousand dollars.  Table
4 gives us the comparable figure for those presidents least likely
to have outside income.  The median Company Man president at
the top 100 firms paid taxes of 14 million.  Apparently, outside
investment income may have caused the Table 3 estimates to
exceed actual executive compensation by as much as 7 percent.
Among the largest 500 firms, the median president paid taxes of
11 million (Table 3).  The   estimate using Company Men (Table
4) indicates that the median president may have paid taxes on
compensation income of about 10 million.

				Insert Table 4 here

	Adjusting for both capital income and size of company, we
estimate that American executives earn not 8.7 times as much as
Japanese (the multiple ignoring company size) or 3.75 (the
multiple adjusting for size but not capital income), but 5.2 times
as much---  a typical CEO's compensation would be 5.2 times as
high if his company were American rather than Japanese.  Thus,
we conclude:

  \noindent
{\bf     Finding 1:  Japanese executives earn 19.2\% as much as American
executives,adjusting for firm size.} 

  Studies often compare the ratio of executive salaries to those of
ordinary workers.  Kaplan (1994, p. 536) reports a ratio of 13.5
for the pay of US executives in 1983; Kato \& Long (2006, p. 959)
report   ratios of 7 for China around 1998-2002, 4.2 for Japan in
1995-96,  and 5.6 for Korea in 199--2001.   We estimate a ratio
of 6.6 for Japan in 2004 for the income of the average Company
Man to the average worker.\footnote{We used the 2004 average wage in manufacturing from the
International Labor Organization, \url{http://laborsta.ilo.org/.}  We
estimate the ratio for an executive of the average-sized firm in our
sample. Since such a firm’s executive would pay on average less
than the 10 million yen minimum tax for reporting, we use the
predicted value of his wage from regression equation V-1 below,
dividing the tax bill by .37 as explained above.}



\bigskip \noindent
{\bf     4. What Determines Executive Income?}

  \noindent
{\bf      4.1.   Three Theories}

      Having estimated the amount that Japanese executives are
paid, the next question is why some are paid more than others.
Theories of executive pay can be divided into three groups:
market theories, incentive theories, and capture theories.

\noindent
	(1) Market theories focus on supply and demand, and explain
pay patterns by how much a firm benefits from talented
management and how much it needs to pay managers to take a
difficult but prestigious job.  High pay would be observed at a
company with a special need for talent (e.g., the information-
processing need studied in Henderson \& Fredrickson [1996]) or a
company whose CEO position was unattractive because of such
factors as its location or scandal-ridden history.  Low pay would
be observed at a company where talent had a lower marginal
product or where the CEO was willing to accept a lower salary
because of a personal attraction to the company.  Stewardship
theories of management (e.g., Davis, Schoorman \& Donaldson
[1997]; Deckop, Mangel \& Cirka [1999], Wasserman [2006]) are
market theories to the extent that they describe situations where
non-monetary incentives control manager behavior.  Under these
theories, actual compensation remains a function of what a
company is willing to pay and what a manager is willing to accept.
Under any market theory of compensation, pay-for-performance
would have little effect on performance.  Instead, incentive pay
schemes more likely reflect factors like tax avoidance strategies.

	If we were able to observe talent, a market theory would
predict a clear correlation with pay.  Consistent with this logic,
Tosi, Misangyi, Fanelli, Waldman \& Yammarino (1996) find that
charisma---a form of talent---is related to pay and firm
performance. Because most facets of talent are not observable
directly, however, scholarly attention has focussed on firm size
instead.  Gabaix \& Landier (2008) construct a matching model of
the supply and demand for top executives and suggest (with
supporting data) that a firm’s market value and the market value
of other firms in its industry explain the bulk of executive
compensation. Holmstrom (2005) provides valuable informal
comments on the importance of market value and benchmarking
that support the Gabaix-Landier theory.  It is also supported by
the meta-analysis of Tosi, Werner, Katz \& Gomez-Mejia (2000),
who find that 40\% of the variance in CEO pay in the United
States can be explained by company size, compared to only 5\% by
performance.  Kaplan \& Rauh (2010) conclude that the recent rise
in the incomes of the highest-earning Americans---with special
attention to executives--- represents returns to superstars and the
impact of increases in firm size that make their talent more
productive, (although they also cite technological change).
Because we have only one year of data, we focus on firm size.

\noindent
	(2) Incentive theories proceed from agency theory to focus
on the way firms structure compensation contracts to induce their
managers to work hard and make appropriate decisions.  These
theories predict that managerial pay will increase with company
performance.  Because bigger agency problems require higher-
powered incentives, they also predict that managerial pay will
correlate with the risks that executives personally bear.  Since
Jensen \& Meckling (1976) and Fama \& Jensen (1983) there has
been a tremendous outpouring of work, both theoretical and
empirical, on the incentive effects of executive contracts, looking
both at how executive pay and wealth vary with performance and
how performance varies with executive incentives.  Jensen \&
Murphy’s (1990) much-cited study showed that a dollar value of
increase in a company’s value seemed to have too tiny an effect
on executive wealth to be important.  Since 1990, however,
companies in the United States increasingly use stock options, and
Conyon, Core \& Guay (2006) find that the exceptional American
use of incentive pay (with its need for a higher expected value of
pay  to compensate for risk) can explain why executive pay is
lower in the United Kingdom.

	 In recent work scholars have focussed on the way firms vary
in how they relate pay to performance.  In effect, they make the
compensation structure endogenous.  Coles, Lemmon \& Meschke
(2007) and Edmans, Gabaix \& Landier (2007) build structural
models with a multiplicative production function in which effort
and firm size are complements.  Coles, Lemmon \& Meschke use
this and CEO risk aversion to explain why Tobin’s q (which
measures a firm’s opportunities as well as a manager’s ability to
create value from investment) is higher with moderate levels of
the CEO’s ownership of the firm than for low or high levels.
Edmans, Gabaix \& Landier combine the multiplicative form with
the talent-matching model of Gabaix \& Landier (2008) to show
that the dollar/dollar sensitivity of pay to performance found to
be so small by Jensen \& Murphy (1990) should indeed decline
with firm size, but that the dollar/percentage-change sensitivity
(scaled by the level of pay) would be invariant to firm size and
would deter a plausible amount of shirking.

	These recent studies yield two lessons potentially relevant to
our analysis of Japan.  First, the sensitivity of pay to performance
is endogenous.  As a result,  different structural models will imply
different interaction terms for sensitivity with other variables.
Second, where pay varies with performance, it may turn on rates
rather than levels:  pay may be sensitive to changes in percentage
changes in profit rather than to dollar changes.

	That pay is based on incentives compensation contracts may
not be the most cost-effective way to motivate Japanese
executives.  Hypothetically, for example, contrary to the incentive
theory perhaps non-material incentives are overwhelmingly
important for agents at the income level of CEO’s.  Or perhaps
boards can constrain agency slack more effectively by monitoring
executives directly.  CEOs are highly visible, after all, and may
care deeply about their reputation with their peers and with the
world at large.  A particular example of this is the ability of the
CEO to join the board of his own or another company, as has
been studied in the Japanese context by Brickley, Coles \& Linck
(2000) and Rebick (1995).  And perhaps incentive pay is simply
too hard to implement rigorously and safely.  Even if it could
prove valuable in theory,  top executives can too readily
manipulate accounting numbers and the public release of
information (as Jensen \& Murphy [2004] warn).


\noindent
	(3) Capture theories focus on the relative balance of power
between shareholders and executives.  The most prominent
modern example is Bebchuk \& Fried (2004).  If a firm's
shareholders are few and can readily organize, for instance, it will
pay its executives less than a firm ``captured'' by those executives.
At the captured firm, the executives may stack the board with
more generous directors, or appoint people more inclined to please
them (the executives).  Variations in pay, by these capture
theories, will correlate more closely with the strength of a firm's
corporate governance than with its need for talent or its need to
incentivize its managers.

	Scholars suggest a variety of ways to measure the strength of
a firm's corporate governance. One set of variables relates to the
board of directors -- its size, the proportion of inside directors, and
the length of their tenure, all of which would be associated with
weaker control.  A second set relates to the concentration of
ownership -- the number of large shareholders, whether they are
corporate, family, or individual, and how much of the stock is held
by executives.  Bebchuk \& Fried (2004) discuss these in depth,
and Boyd (1994) and Coombes \& Gilley (2005) find evidence that
in the U.S. stronger board control is associated with lower
executive salaries.

	Governance clearly interacts with productivity. Coombes \&
Gilley (2005) find that stakeholder management is associated with
less incentive pay, and Hartzell \& Starks (2003) find that
ownership by institutional investors is correlated with increased
sensitivity of CEO pay to company performance.  On the other
hand, Brickley, Coles \& Jarrell (1997) point to the value-
increasing benefits of combining the positions of CEO and
chairman of the board of directors and present empirical evidence
suggesting that doing so does not result in lower performance by
the firm.  They note that firms which make the unusual choice to
separate the positions do so for special reasons such as smoothing
succession between one CEO and the next.

	As with incentive pay contracts, governance structures are
endogenous (Hermalin \& Weisbach [1998], Himmelberg, Hubbard
\& Palia [1999]).  Firms with apparently poor governance features
may have chosen them for profit-maximizing reasons.  Coles,
Lemmon \& Wang (2008) follow up on Coles, Lemmon \&
Meschke (2007) by adding to their model the choice of the
proportion of outsiders on the board of directors.   For a firm to
employ outside directors has its downside, because outsiders are
less well informed about the firm than insiders and so may make
worse decisions.  A profit-maximizing firm trades this off against
the monitoring advantage of outside directors, which permits less
risk to be imposed on managers by substituting for the effort
incentive in the pay-performance link.  Endogeneity is a serious
problem for tests of the capture theory, because a firm which hires
a more productive manager may have less need to oversee his
performance and hence use a weaker corporate governance
structure.

	  All three theories predict lower pay in Japan,  market theory
pointing to internal hiring which restricts competition across
companies for CEO-level talent, incentive theory pointing to
closer direct control by large shareholders which makes incentive
pay less necessary, and capture theory pointing to that same direct
control but as reducing CEO power to set salaries.  Thus, our
finding that executive pay is lower in Japan does not reject any of
the theories.

\bigskip
 \noindent
{\bf     4.2.  A Combined Theoretical Framework}

	The market, incentive, and capture theories of executive pay
each have their own implications, but they can be combined, as
we will do in the model below.  We will then explore which parts
of the combined theory show up as significant in regression
analysis.

	 Let us suppose that executive compensation is determined in
a marketplace, but one complicated by incentives and capture.
Let us use subscript $ i $ to mark executive-level variables, $ j$ to mark
firm-level variables, and $ij$ to mark variables resulting from a
combination of executive $i$ and firm$ j$.  On the supply side,
executive $ i$ has talent $t_i$, and a risk-averse utility function
increasing in the wage,  $ w_i $  , but decreasing in effort, $  e_i $ :
\begin{equation}
                                u_i = f(w_i) - e_i,
\end{equation}
where f is a strictly concave increasing function.  Executives
choose firms based on the contracts the firms offer, and they have
a reservation utility increasing in their talent:  $  u(t_i)$, so that $ u’(t_i)>
0. $ 

	Assume that $  p_{ij }$, the profit gross of executive pay, is a function of the base profitability of the firm  $ b_j $  plus the marginal product of the executive, which in turn depends on his talent, his effort, the size of the firm  $ x $, various control variables such as age that we will represent  by  $ c_i$, where only the base profitability, talent, and the size of the firm are observable by  boards of directors:
\begin{equation}
                     p_{ij} =    b_j +  t_i*e_i*x_j*c_i 
 \end{equation}

	As in Gabaix \& Landier (2008) we use a multiplicative
specification in which talent and size are complements, something
which will be important in the empirical estimation.

	If a board of directors wants its executive to choose other
than minimal effort, it will have to use an incentive contract,
based on observable variables.  The exact form of the contract
would depend on the exact form of the distribution of noise and
on the executive’s utility function, but we know that the realized
value of $w_{ij}$  will be a function of observed profit.

  	Let there be many potential executives of each talent level
relative to the number of firms.  In that case, executives will be
willing to work for as low as their reservation level of utility.
Combined with the need to induce high effort by imposing risk on
the executive, this will determine the expected value of the market
wage, $  w_m(t_i). $ 

	The objective,  $ v_j$, of the board of directors at firm  $ j $  is a combination of profit and a desire to overpay the executive, the balance of these two depending on governance slack,  $ s_j$ --- an index of features of the firm such as the percentage of inside directors. Letting  $ z_j  $ denote the overpayment at firm $  j $  (so $  w_{ij} = w_m(t_i)+ z_j$), we will specify the objective function as
\begin{equation}
\begin{array}{ll}
           v_j  &=  [p_{ij} -w_{ij}] +   s_j*h (z_j)\\
 & \\
        &  =   b_j +  t_i*e_i*x_j*c_i  - w_m(t_i) - z_j  +s_j*h(z_j),\\
\end{array}
 \end{equation}
where $  h $  is an increasing function of $  z $  and the second line
substitutes for the profit function from equation (2).

	 The board of directors chooses the levels of talent ti and
overpayment $  z_j $  to maximize $  v_j$.  If  $ s_j=0 $  then the firm maximizes
profit.  Since the marginal utility of $  z_j $  is increasing in governance
slack,  $ s_j,$  more slack will lead to higher $  z_j $  and a higher wage
relative to the market wage.  Since size and talent are
complements, and the market wage rises with talent, the board of
a bigger firm will choose a higher level of talent.  Since higher
levels of talent cost more because of higher market wages, bigger
firms will be seen to pay higher wages for a given level of slack.

	  The market will be in disequilibrium in the sense that
executives would prefer to work at a firm with more slack and
there will be excess supply for such jobs.  It will be in equilibrium,
however, in the sense that the boards at such firms derive utility
from the overpayment and would not accept an offer from an
executive to work for lower pay.

	Thus, we have a model in which executive compensation
rises with the size of the firm via the more expensive high talent
that bigger firms hire, with profits via the need to induce effort;
and with governance slack via the desire of boards to overpay
executives, and with other variables such as age that might affect
an executive’s marginal product.  We will not attempt to solve for
this model’s wage equation, which will depend on such
unobservables as the executive’s utility function and how
reservation utilities depend on talent.  Rather, we will estimate a
reduced form to see how the wage depends on size, profit,
governance, and control variables, and we will try various
measures of those variables.

	The model is limiting in several respects. It assumes that
executives have the same utility as a function of compensation,
where in fact we would expect the marginal utility of
compensation to depend on wealth.  Wealthy executives will tend
to invest in ways that diversify away some of the risks specific to
the firms they run.  As a result, to motivate them to maximize firm
value, rational employers might pay them a riskier compensation
package then they would pay an executive without that diversified
investment portfolio.\footnote{To the extent presidents do not diversify, of course, firms
would not need to pay them higher powered compensation
packages.  Our Capitalist dataset below includes presidents who
hold very large interests in the firm.}  In addition, to the extent that an
executive’s capital income comes from investments outside the
firm his income---which is what we measure---will not vary with
the firm’s profitability.  We will adjust for this in the same way we
did when estimating executive compensation, by separating out
the Capitalists.


    
	Separating out the Capitalists is also important because the
effect of governance slack could be very different for the
companies they run.  Concentrated ownership, for example, can
reduce governance slack by giving the lead shareholders ample
incentive to monitor the board of directors, but if ownership is
concentrated in the CEO, the concentration will increase
governance slack in our model, as the board will weight profits
(which must be shared with minority shareholders ) less and
overpayment more.

	Endogeneity is an additional problem.  The stake that an
executive holds in his firm depends on his compensation.  If he
earned a high salary in 2004, he probably earned high salaries in
several preceding years too.  Indeed, the 593 presidents who
appeared on the high-income taxpayer list in 2004 had appeared a
mean 7.3 times; 322 had appeared at least five times, and 155 had
appeared at least ten.  Over the years, no doubt they saved some
of their earnings, and many invested those savings in the firm.
Necessarily, then, any corporate governance variable involving the
shares held by the president himself is endogenous.  In addition, as
we will see below, any test of the capture hypothesis is plagued by
the possibility that governance variables are endogenously chosen
to increase productivity at a given firm rather than to protect the
executive.   Crucially, however, this is a problem for any study of
executive compensation --- it is not caused by our aggregation of
capital and labor income.

\bigskip 
\noindent
{\bf    4.3.  The Variables}

	  The next step is to choose observable measures of executive
compensation and firm size, profit, and governance slack, and to
decide what control variables to include.   The Appendix contains
detailed definitions of the variables, but we will explain them here
in enough detail for the reader to understand the regressions.

	The first set of variables is at the level of the individual
executive.  We will use an executive’s tax liability as our proxy for
income.  We will use a logarithmic specification in accordance
with the common finding of a constant elasticity of pay with
respect to firm size.  Our data also includes the total number of
appearances an executive has made on the high-income taxpayer
list conditional upon appearing in 2004, and we will also try using
this cruder proxy for income.  A number of other executive-level
variables might be expected to affect an executive’s income.
These include whether he holds positions at multiple firms, his
share holdings in the firm which employs him, and his age, all of
which we would expect to increase income.

	Other variables are at the level of the corporation.  We have
several possible measures for size, which we expect to have a
positive effect on executive income.   The most conventional is
the amount of the firm’s assets, but we also will try the firm’s
market capitalization and its sales.  To test the incentive theory,
we will use the firm’s return on assets and its stock price growth.
We will also include a variable for whether the firm had an option
program for its executives, which we would expect to increase
income under the incentive theory, and for whether the firm used
American-style SEC accounting in its public reports.  We do not
know what effect this might have on executive pay, but since it
affects the levels of variables such as assets we include it as a
conditioning variable.

	The governance variables that we use to test the capture
theory are also at the firm level.  Here, the difficulty of choosing
variables becomes greater. ``Governance slack’’ could have more
than one cause, and what indicates slack at one company might
not at another.  The first variable we include is whether the firm is
a family company (of a family other than the CEO’s), as measured
by two board members having the same last name or a board
member having the same name as the company.  A family
company might have tighter governance because of historical
continuity with control by the founding shareholders, and so
would pay less under the capture theory.  Concentration of
ownership would also result in tighter governance, since the
executive could not so easily control elections to the board of
directors, so we will use two measures of concentration: the
fraction of the company owned by the top five shareholders, and
the fraction owned by members of the board other than the
executive.  The size of the board would matter if a large board
results in less effort by board members, and a large board would
result in higher pay.  The percentage of independent, non-
employee, directors is the variable that has attracted the most
attention in reform efforts, and would tighten governance and
reduce slack.  Finally, one might expect that if the average tenure
of board members is higher or they are older, their interests would
be more aligned with those of the CEO and his pay would be
higher.


\bigskip
\noindent
{\bf 4.4. Regression Results}

\noindent
{\bf	1. Main results.}  Table 5 shows the results of four
specifications of a tobit regression for the determinants of
executive income (as explained earlier, we use tobit because we do
not observe tax bills under 10 million yen).  All specifications
include industry dummies and a dummy for whether the firm
followed American-style SEC accounting rules.\footnote {  As Table 5 shows, the accounting system does not come in
significant.  We do not report the industry dummies, but they turn
out to be unimportant (though note that we have excluded banks
from our sample already).}  In specification
(a) we aggregate Company Men and Capitalists; in the others we
keep them separate.  In specifications (a) and (b) we include only
firm size and profitability variables; in specification (c) we add
variables such as age that potentially capture executive
productivity; and in specification (d) we add variables that
potentially reflect governance slack. Specification (d)  thus
estimates the full theoretical model described above.  By contrast,
in specifications (a), (b), and (c) we assume that the full model’s
governance slack variable, s, takes the value of zero.





 Insert Table 5 here. 

  According to specification (a), executive income has an elasticity
with respect to firm size of .18 and increases with profitability (the
semi-elasticity is 4.7\%).  It does not increase with stock price
growth.  Because the regression aggregates executives with and
without capital income, however, we take these conclusions with
caution, and focus on the next three regressions.  There, we
disaggregate the two groups of executives.

\bigskip
 \noindent
{\bf     	2. Exposition.}  First, let us explain the presentation of
regressions (b), (c) and (d) in Table 5 (and  the regressions in  the
remaining tables).  For each regression, we provide two columns.
Column (i)  gives the variable’s effect on Company Men, and
column (ii)  gives its additional effect on Capitalists.  These two
effects provide fundamentally different information.  The effect
on Company Men gives the pure effect of the variables on
executive pay (though many Company Men do earn some capital
income).  By contrast, the extra effects on Capitalists potentially
come from two sources:  from the CEO's investment income, and
from any pay difference caused by varying levels of governance
slack among CEO-controlled firms.






  More specifically, each of these two effects gives the marginal
effect on the log of an executive’s tax liability of an increase in the
independent variable, as computed at the median.\footnote{In many tobit regressions (e.g., those in Ramseyer \&
Rasmusen (2003)), the regression coefficients have little meaning
in themselves and must be converted to ``marginal effects'' by
seeing how their effect on the underlying indicator variable
translates into a change in the expected value of the observed
variable.  That does not apply here.  Here, we use tobit because
we do not observe the exact levels of taxes paid if they are below
10 million yen, not because the minimum level of taxes an
executive can legally pay is 10 million no matter what his income.
We are not interested in how independent variables affect the
expected {\it observed level of taxes,} which is usually the censoring
bound of 10 million, but in how they affect the taxes themselves.
A predicted level of taxes below the censoring bound---8 million,
for example--- makes sense in our regression, unlike in the typical
tobit setting. Thus the tobit coefficient itself, the ``linear
predictor,''is the correct measure of the marginal effect.}
  The number
0.263 in column (b-i) indicates that a rise of X in the log of
company assets increases the log of executive income by .263*X.
Because both variables are in logarithms, the elasticity of income
with respect to assets is +26.3\%.  The number -0.034 in column
(b-ii) is the additional effect for Capitalists -- which we take from
the coefficient on the interaction variable Log(Assets)*Capitalist.
Hence, the total elasticity of income with respect to firm assets for
Capitalists is .263 + .034 = .297.

  Much the same interpretation applies to the t-statistics.  The t-
statistic of 8.87 on the coefficient 0.263 tells us that the effect of
assets on pay is significantly different from zero for Company
Men.  The t-statistic of 0.60 on the coefficient 0.034 tells us that
the effect of assets on pay for Capitalists is insignificantly different
from the effect of assets on that of Company Men.  To test for
whether the effect of size on the pay of Capitalists is significantly
different from zero,  we need to do an F-test test on the sum of
the coefficients.  Doing so yields the highly significant F-statistic
of 34.09.

  Discrete variables must be interpreted somewhat differently. The
number 6.732 in column (b-i) is the constant. It represents the
effect on Log(Tax Liability) of simply being in the dataset.  The
number .805 in column (b-ii) is the effect on Log(Tax Liability) of
being a Capitalist, computed using a {\it Capitalist} dummy.
Accordingly, the conditional mean log income tax for Capitalists is
6.732 + .805 = 7.537.  For discrete variables that have small
effects (e.g., Option Program in column (c-i), with its marginal
effect of 0.187), the effect is close to the percentage increase.  For
an increase in its log from 6.732 to 7.537, however Tax rises not
by 80.5\% but by 124\%.

\bigskip
 \noindent
{\bf     	3.  Executive-level variables.}  Specifications (b) and (c)
reflect a model that excludes the capture theory a priori (in effect,
a model that assumes s=0).  We include regression (b) as a
robustness check because it uses only the variables most
commonly included in executive pay regressions.  In this simpler
specification, the impact of size, profitability, and stock growth is
much the same as in specification (c).  Given that specification (c)
includes the executive-level variables, we shall focus primarily on
it in the discussion below.

  Specification (c) shows that income rises with the size of the
company for both types of executives.  Studies based on U.S.
ExecuComp data reach much the same conclusion.  In their
various specifications, for example, Gabaix \& Landier (2008) find
elasticities ranging from .26 to .37.  For Company Men, we find
that income rises by 2.17\% for each 10\% increase in size.  For
Capitalists, we find no significant difference.  Thus we obtain
Finding 2.

\bigskip \noindent
{\bf     Finding 2: Executive pay in Japan rises with company size at a
rate of 2.17\% for each 10\% increase in assets.}

  An increase in a firm's stock price raises the income of
Capitalists but not of Company Men.  This phenomenon is what
one would expect -- not from any need for incentives, but simply
from their stock ownership.  By contrast, profitability measured as
return on assets has a positive and significant effect on the income
of both groups of executives.  Thus we obtain Finding 3.

\bigskip \noindent
{\bf     Finding 3:  Stock price growth fails to explain differences in the
incomes of employee CEO’s in Japan, but their incomes do rise by
3.4\% with each additional 1\% of accounting profitability.}

  Studies of American CEOs beginning with Jensen \& Murphy
(1990) have routinely found that performance has a small effect
on CEO pay.  We find that a 1\% increase in the level of
performance (e.g. from 4\% to 5\%) is associated with a 3.4\%
increase in pay (at that starting level, an elasticity of .14).   Using
Japanese tax data similar to ours, Basu, Hwang, Mitsudome \&
Weintrop (2007) similarly find a positive effect of accounting
profit on executive income, but they do not distinguish Company
Men from Capitalists.

  Using survey data on a panel of 51 Japanese firms from 1986 to
1995, Kato \& Kubo (2006) find that return on assets has a
statistically significant effect on executive pay, but at a lower
magnitude:   a 1\% increase in performance leads to a 1.4\%
increase in pay.  In part, their lower magnitude could result from a
difference in the period covered:  their data include the years
before and during the 1990s recession, while our year dates after
its end.   Or, the differences between Kabo \& Kubo's results and
ours might reflect the different methodology.  We use cross-
sectional data from one year to ask   whether performance
explains pay differences among firms.  By contrast, Kato \& Kubo
use panel data to ask whether year-to-year changes in performance
at a single firm affect the CEO's pay.  If executives at more
profitable firms earn higher pay, that difference would be captured
by their firm-level fixed effects and would not appear in their
1.4\% increase.  We find that more profitable firms pay more; they
find that firms which become more profitable pay more.

   Our executive-level control variables generate several significant
results.  First, Company Men who hold positions at multiple
companies earn higher incomes (the coefficient is .395), but the
total effect of such multiple positions on Capitalists (.127 = .395 -
.268) is insignificantly different from 0 (F=.60).  Of the 1,048
Company Man presidents, 12.5 percent held multiple positions,
but only 9.7 percent of the 383 Capitalist presidents did.  Perhaps
the Capitalist presidents do not earn additional income from their
multiple positions because they hold the extra positions at affiliate
firms.  Hajime Satomi, for example, served as president and board
chairman at the Sega Sammy Holdings entertainment empire, but
also worked as president of the constituent video-game firm,
Sammy Networks.  Toshifumi Suzuki simultaneously served as
chairman of the board of the Ito Yokado supermarket chain and
the affiliated convenience store chain Seven-Eleven Japan.  We
hesitate to push this explanation, however, because of the few
presidents involved.  Only 20 presidents of family firms in our
dataset held additional board positions, and only 27 presidents
who qualified as top-10 shareholders did so -- and 10 of the two
groups overlapped.  With so few datapoints, the phenomenon
could also represent an artifact of small  numbers.

  Second, Company Men who hold positions at firms with option
programs also earn higher incomes (the coefficient is .187), but
the total effect of the programs on Capitalists (.030 =.187-.153) is
again insignificant (F=.11).  Of our Capitalist presidents 40
percent had an option program while only 25 percent of the
Company Men did.

  Third, an executive’s income increases with age, at about 2.2\%
per year.  This phenomenon holds whether he is a Capitalist or a 
Company Man.

    Finally, an executive's income increases with the value of his
shareholdings.  Unfortunately, we have shareholding data only on
the Capitalists -- our data extend only to the top 10 shareholders,
and by definition all such shareholders are Capitalists.

\bigskip

 \noindent
{\bf     	4.  Governance variables. } Specification (d) includes our
governance variables.\footnote{ In earlier versions of this article, we also included a dummy
variable for whether a firm had adopted a "U.S.-style" board
committee structure available under the new Japanese corporate
code.  Consistently, the calculated coefficients were insignificant.
Unfortunately, inclusion of the variable in the specifications used
in this version cause tobit not to converge.  Accordingly, we have
omitted the discussion of this variable.} First, firms controlled by a family other
than the executive’s own family pay Company Men presidents
less, with a coefficient of -.234.  For Capitalists, the total effect is
insignificant (F= .14, p=.71).

  Second, firms in which the top 5 shareholders hold a large
interest pay Company Men less (a 0.5\% decline per 1\% increase in
top 5 ownership), though the effect is significant only at the 10\%
level.  By contrast, they pay Capitalists significantly more (a highly
significant net effect of -.5 + 2.0 = 1.5 percent, F = 11.98).  This
accords with the idea that slack governance may result both from
dispersed ownership when the CEO is not a major owner, and
from concentrated ownership when the CEO is himself one of the
controlling owners.

  Third, firms whose directors have long tenure pay Company Men
more,  but those with an older board of directors (conditioning on
board tenure) pay them less.  The tenure effect is consistent with
the hypothesis that presidents "capture" long-running boards, but
the age effect contradicts the capture theory’s prediction that
longer relationships will make for easier capture.

	The other governance variables do not have statistically
significant effects for either Company Men or Capitalists.
Observers have sometimes argued that board members with large
ownership stakes would monitor the firm more closely.  In fact,
firms where board members other than the president hold large
amounts of stock do not pay their presidents less.  Observers
similarly argue that small boards may monitor a firm more closely.
In fact, firms with small boards do not pay their presidents less
either.  And observers often argue that independent directors will
monitor the firm more closely.  Again, firms with higher
percentages of independent directors do not pay their presidents
less.

	A test for all the governance coefficients equaling zero
rejects that hypothesis with F= 8.43, which is highly significant.
Finding 4 summarizes our results.

\bigskip

 \noindent
{\bf     Finding 4:  Family companies, firms with more ownership
concentrated in the top 5 shareholders, and those with older board
members have employee presidents with lower incomes, while
employee presidents whose board members have longer average
tenure have higher incomes.  Board size, the percentage of outside
directors, and the stock holdings of directors other than the
executive have no significant effect.}

  Although Finding 4 lends some (albeit haphazard) support to a
"capture" theory of executive compensation, the results are
generally also consistent with a market theory.  Family companies
and firms with more concentrated ownership might have greater
control over employee executives, for example, but that very fact
means that they have less need or desire for a more talented (and
expensive) executive.  Shareholders in firms with longer-running
boards may retain the board members because they have done so
well.  If those boards pay their presidents high salaries, perhaps
they pay them well because the executives perform well on
dimensions unobserved in the regression.

  Several differences between our results and those of Basu,
Hwang, Mitsudome \& Weintrop (2007) stem from their decision
not to distinguish between presidents with larger and smaller
stakes in the firm.  For example, they find that the share of the
firm owned by board members has a significant positive effect on
executive pay, where we find a negative effect for Company Men.
They correctly note that this positive effect might reflect capital
income -- an observation that would reconcile our findings with
theirs.  They similarly find that family firms (defined somewhat
differently) have higher executive incomes.  Again, however, they
note that this may reflect the fact that family executives earn
substantial investment incomes.

\bigskip \noindent
{\bf     	5.  Accounting rules.}  Whether a firm uses Japanese or U.S.
(SEC) accounting rules has no significant effect on observed tax
liability.  We experimented with interacting the accounting
variable with Profitability.  If we take the simple specification (a)
of Table V, for example, whether we include SEC
Accounting*Profitability, the coefficients on Profitability and
Profitability*Capitalist remain largely unchanged.  The coefficient
on SEC Accounting*Profitability itself is insignificant.

\bigskip 

\noindent
{\bf	6. Comparison with U.S. Executives.} 

   Our methodology of course does not apply to American executives, but since data on them is more easily available, it may be of interest to perform our regression American data too, as comparably as possible. We therefore selected  a sample of American companies of  size   from Compustat  of roughly the same size as our Japanese populations and performed the regressions of Table 5 on them. Specifically, we selected U.S. firms with size between 10\% above and 10\% below the level of the range of our Japanese sample.   Table 5-a shows the results. 
  
  Insert Table 5-a    here

  Let us focus on regressions c(i) and c(ii), which include the corporate governance variables. First, note that compensation  clearly increases with firms size as measured by assets, but at a close to linear rate for American firms compared to a much slower rate for Japanese firms.  Accounting profitability's coefficient is exactly the same for both countries, with pay increasing significantly with profits.   Growth of the stock price, however, which had  a small and insignificant effect in Japan, has a large and signficant effect in the United States, perhaps due to the common American practice of giving a large part of compensation in the form of stock options (a practice so common that we do not bother to incude a separate variable for it, unlike for the Japanese firms). 

 In Japan, older executive earned higher pay, but not in America, where the effect was tiny and statistically insignificant.    In Japan, higher shareholdings by the executive were associated with higher pay, but  in the United States, the effect  is negative.  

   The corporate governance variables had different effects in Japan and the United States. The only variable  that had the same effect was the shareholdings of board members other than the executive, which had no effect in either country.   In Japan, the share of the top five shareholders and the average age of board members  was associated with lower executive pay, but neither variable was significant in the U.S.  In the U.S., a smaller board and more independent directors increased pay, but neither of those variables matter in Japan.  Finally, board tenure increases pay in Japan and reduces it (though with a much smaller coefficient) in the U.S. 

   

\bigskip 

\noindent
{\bf     	7.  Explaining Differences in Incomes from 2003 to 2004.}
The panel data available to us is limited, but we do have data for
the amount of income tax paid in 2003 as well as in 2004.  For
executives who paid more than 10 million in tax in both years, we
can look at what might explain the change in their incomes over
time.  This is a smaller sample, and it being selected for high
incomes  makes it subject to our criticism of previous studies.  It
does, however, have the advantage that by looking at differences
across time we implicitly adjust for executive- or firm-specific
effects. Thus, in Table 6.  we estimate the determinants of pay in
first differences. For the 484 presidents who paid at least 10
million yen in taxes in both years, we calculate the change in their
tax liability, an increase for 253 and a decline for 131 of them.
We then regress this change on fractional increases in the return
on assets (which is negative for 129 firms), sales (121), and the
stock price (52). We omit other variables such as company size
because those change slowly or seldom enough across time that
we would not expect them to explain year-to-year changes in pay.
The regressions are in levels rather than logs (as we used in Table
V) because so many of the variables take negative values.  We
also include a dummy for SEC-style accounting, since that could
be correlated with accounting profitability, and we allow separate
intercepts for Capitalists and Company Men.

  Insert Table 6    here

 	Regression (a) shows that in a regression using all 439
presidents for whom both the tax variable and the other variables
were all available nothing is statistically significant (not even the
constants) except for the effect of stock price growth on
Capitalists, which takes the expected positive value.  Our
dependent variable, the change in tax liability, however, includes
extreme outliers.  Its median value is 1,592 thousand yen, but it
varies from -220,320   to 828,817 thousand.  Trimming at the 5th
and 95th percentile values of -11,271 and 37,869 thousand yen
yields regressions (b) and (c).   After removing the outliers, a
number of  coefficients become statistically significant, most
notably accounting profitability, which has a positive effect for
Company Men but a significantly less positive effect for
Capitalists (for a net effect of about zero on Capitalists; an F-test
rejects zero with only p=.81).  The coefficient of accounting
profitability has a coefficient of  707, which corresponds to an
elasticity of the change in tax with respect to a change in
profitability for Company Men of .16 (= 700*.80/3453) at the
means for the sample used in the regression and  .22 (=
700*.50/1592) at the medians.  These are comparable to the
elasticity of .14 found from the cross-section regressions in Table
V.  Since these results do, in effect, adjust for firm-specific effects,
like those in Kato \& Kubo (2006),  but have a larger magnitude
they suggest that incentive pay is more important than Kato \&
Kubo found, at least for this later time period.

	Other variables in regression (b) are also significant.  The
rate of sales growth has an insignificant effect on the income of
Company Men, but an additional positive effect (and overall
positive effect; an F-test yields p=.02) for Capitalists.  Stock price
growth is insignificant for Company Men, with a significantly
higher effect on Capitalists but an overall effect that is
insignificant (at p=.22 for the F-test).  The constant is positive
and not significantly different for Capitalists, indicating that
incomes rose on average for executives adjusting for the other
included variables, and the presidents of firms that used SEC-style
accounting had incomes that were significantly higher, an effect of
very large magnitude.  This effect is so large as to make us suspect
that it is not to due the accounting itself, but to something else
correlated with a firm’s adoption of SEC-style accounting.  We ran
Regression (c) without the SEC-style accounting variable as a
check to see if it was affecting our results.  It seems it was not;
regression (c) has much the same results as regression (b) in both
significances and coefficient sizes.

	Thus, the regressions on differences in tax paid across the
two years available to us confirm our finding that accounting
profitability does matter to executive salaries, but stock price
growth does not.


	\bigskip

 \noindent
{\bf        	          5.   Alternative Regression Techniques and
Variable Measures}

\bigskip

 \noindent
{\bf    5.1.  Alternative Measures of Size and Performance}

  In Table 7, we repeat our basic regression  with different
measures of  firm size and performance.

	First, because some studies of U.S. executive compensation
measure firm size by sales or market capitalization, we try using
those measures in place of assets.   Size is significant for any of
these size measures, and the elasticity of executive income with
respect to size varies only from .217 for assets to .252 for market
capitalization to .194 for sales.

	Second, we ask whether Log(Mean Capitalization) (the mean
capitalization of  firm  in the same industry) and Relative
Profitability (the difference between a firm’s Profitability and the
industry mean)  help explain compensation. They do not.


   The matching theory of Gabaix and Landier (2008) says that
market capitalization is the key determinant of executive pay and
suggests that pay is affected by a ``reference firm size'' that could
be special to a year or an industry.  In regression (d),
Log(Capitalization) is significant, but Log(Mean Capitalization) is
not. Executives’ incomes are not pulled up for all firms in an
industry just because most of its firms are large and pay more.
The unimportance of mean industry capitalization is evidence
against the executive market being segmented by industry; in the
assortative matching of our market theory, the fact that a large
firm in an industry with generally small firms does not pay less
than if it were in an industry of large firms shows that it is
competing with firms outside its industry for the most talented
executives.

  	In regression (e), Profitability and Relative Profitability are
both insignificant. The unimportance of relative profitability is a
longstanding puzzle of executive compensation, as discussed in e.
g., Bertrand \& Mullainathan (2001), who have labeled the
puzzle ``pay-for-luck.''  Our model above does not explain it, but
one possibility is that higher manager effort is optimal for the firm
following observable positive demand shocks, and this results in
higher pay, as  Baranchuk, MacDonald \& Yang (forthcoming) suggest.


   Insert Table 7     here

\bigskip

 \noindent
{\bf     5.2.  Robustness Checks: Alternative Regression Techniques and
Definitions of Capitalist}

	In Table 8 we offer four alternative regressions of
executive compensation, again with results very close to those
above.  We include a tobit regression with logged tax liability that
captures the principal results found above (Column (a)); an OLS
regression with logged tax liability on only those presidents who
appeared on the TSR high-income taxpayer list (Column (b),
which is the technique used in Kato \& Rockel [1992]); a probit
regression using the High Income TP dummy as the dependent
variable (Column (c)); and a Poisson regression using the number
of times an executive appeared on that list (Num Appearances) as
the dependent variable (Column (d)), with zeroes omitted since
they are too numerous for a Poisson distribution to be appropriate.
For expositional simplicity, we focus on those variables that most
strongly affect compensation. Regressions (b) (OLS)  and (c) (the
probit on being a high-income taxpayer) show that whether we use
tobit or OLS, company size and accounting profitability are
significantly related to executive income, though  with reduced
coefficient sizes, and stock return is not.  The Poisson regression
for number of appearances is quite different, with company size
and accounting profitability insignificant and stock return having
the wrong sign for Company Men.  An explanation for this might
be that number of appearances is related to the length of time for
which a company retains the same president as much as how
much it pays him, conditional on an executive ever appearing on
the list.

	Panel B of Table 8 shows how the definition of Capitalist
affects a regression of log tax liability on the principal variables.
Our standard definition is that a Capitalist either (i) was among
the top ten shareholders of his firm or (ii) worked at his family
firm.  Alternatively, one might add (iii) executives who appeared
on the high-income taxpayer list five or more times, or (iv) were
under age 40.  Panel A’s regression (a) is our standard definition.
Panel B’s regressions (a), (b), (c) and (d) show that varying the
combination of the four criteria makes little difference to the
regression results except that (c), dropping executives who worked
at their family firm,  results in size of firm having a much smaller
(though still significant) effect on the income of Company Men.


  Insert Table 8     here

     \bigskip

 \noindent
{\bf            6. Concluding Remarks}

	Most studies of executive pay use data on labor income
(salary, bonus, and options), but lack data on investment income,
though executive response to salary incentives depends on their
entire portfolios.   To date, studies of Japanese executives have
lacked good data even on pay, in contrast to studies using the
detailed executive pay filings required by the SEC.  Lacking direct
data on salaries, we instead use tax records.  Standard data from
corporate filings plus this unusual tax data combine to give us a
dataset with corporation and executive characteristics, executive
incomes (labor plus investment income), and an estimate of
executive compensation for some firms.

	We find that Japanese executives earn far less than U.S.
executives.  Firm size held constant, they earn about one-fifth as
much as their U.S. peers.  Using tobit regressions, we conclude
that executive salaries in Japan increase at a rate of 22\% of the
increase in assets.  Salaries also increase with age and accounting
profitability, but not with stock returns.  Corporate governance
variables are subject to the usual endogeneity problems, but family
firms, firms with large lead shareholders, and firms with older
board members appear to pay less and those whose board
members have longer tenure pay more.

\newpage
 

\begin{center}

  
{\bf     Appendix I: Tax Law and  Economic Income versus Taxable Income}
\end{center}


  \noindent
{\bf     	1. The relationship.}  Most executives will report taxable
incomes that understate their true economic incomes.  Like their
counterparts elsewhere, Japanese executives receive a wide array
of untaxed perks from their employers (as estimated in Abowd \&
Bognanno, 1995).   We know of no reason why the ratio of perks
to money income would vary  with the other  variables in our
study, but to the extent that firms that pay more in money offer
fewer perks, our data will be noisier and it will be harder to find
relationships between pay and other variables.

	To the extent that executives have income from other
sources, their taxable income will exceed their labor
compensation.  Being rich, many of these men will earn
substantial investment income, and we do expect investment
income to vary across the type of firms employing an executive.

  \noindent
{\bf     	2.  Dividend income.}  For executives who are major
shareholders at their firms, the tax data will include the dividends
they earn from their firm, but for those who are not, the data will
exclude those dividends.  Through March 31, 2004, dividends
(typically paid in June and December) were subject to a national
withholding tax of 15 percent and a uniform local tax (collected by
the national government) of 5 percent.  After April 1, they were
subject to a national withholding tax of 7 percent and local tax of
3 percent.  Because the withholding satisfied an investor’s liability
with respect to that income, he was not required to include it on
his return.  Should he choose not to include it, the tax he paid on
the dividends did not appear in our data.

	In two contexts, tax law denied investors this option to
exclude dividend income.  First, they could not exclude dividends
from firms unlisted on a stock exchange.  Second, they could not
exclude dividends paid by firms in which they held at least a 5
percent interest.  Of the 1,431 presidents in our database, 174
held more than 5 percent of the stock in their firms.

	Shareholders who held less than 5 percent of their firm’s
shares thus faced a choice:  (a) they could pay the 7 percent
national tax and exclude the dividend income from their returns;
or (b) they could pay the 7 percent tax, include the dividend
income on their returns, and take a credit against their aggregate
tax liability.  Because the dividend income would then be subject
to the much higher marginal rates these executives faced on their
other income, despite a dividends-received tax credit, they would
generally have found it advantageous to pay the withholding tax
and exclude the dividend income.\footnote{   In 2004, the national government withheld taxes on 7.6
trillion yen in dividend income paid to individual taxpayers; those
taxpayers included only 406 billion in dividend income on their
returns.  Compare National Tax Office statistics at
\url{http://www.nta.go.jp/category/toukei/tokei/menu/gensen/h16
/data/02.pdf} (amounts withheld) with
\url{http://www.nta.go.jp/category/toukei/tokei/menu/shinkoku/h1
6/data/01.pdf} (amounts reported on returns) (last visited March
29, 2006).}


 

\bigskip  
\noindent
{\bf     	3.  Capital Gains.}  Nineteen percent of taxpayers reporting
more than 30 million yen in income in 2004 reported some capital
gains income (on securities, property, or some other asset).\footnote{  National Tax Office statistics,
\url{http://www.nta.go.jp/category/toukei/tokei/menu/shinkoku/h1
6/data/01.pdf}  (last visited on March 29, 2006).}  On
unrealized capital gains, they paid no tax.  On their gains from the
sale or exchange of securities, they did pay a tax in 2004 at a
national income tax rate of 7 percent and a local tax rate of 3
percent, the same rates as for dividends.  In this context, the law
did not distinguish between long-term and short-term gains.  As
with dividends, investors could elect whether (i) to satisfy the tax
through withholding and exclude the gains from their returns, or
(ii) to include the gains in their returns.

	A rich taxpayer had no clearly best strategy for dealing with
capital gains, unlike the optimal dividend strategy we just
described.  As the stock market began to recover in 2004, some
investors would have found themselves with substantial capital
appreciation.  Whether our dataset captures any gains they chose
to recognize by selling the stock, we cannot say.  Regardless of
whether an investor elected to include capital gains on his return
instead of using withholding, he faced the same 7 percent tax rate.
In either case he had the same right to carry forward any losses for
three years.  And in either case he had the same ability to time his
gains and losses by choosing when to sell which securities.

	Gains from the sale or exchange of real estate were taxed at
separate rates, but not through withholding.  Instead, investors
had to include the gains on their returns.  They paid a 15 percent
tax if they held the property more than 5 years, and 30 percent if
held it for 5 or less years.

  \noindent
{\bf     	4.  Stock options. }  Stock options are far less important in
Japan than in the United States, but since the late 1990s, Japanese
firms have been able to offer their senior executives tax-favored
stock option plans.  Provided a plan "qualifies" under the tax
code, an executive obtains a variety of tax benefits:  he pays no
tax when he receives the option; pays no tax when he exercises the
option; and pays tax only at the very low capital gains rates when
he eventually sells the stock he bought upon exercise.\footnote{   See generally Kato, Lemmon, Luo \& Schallheim (2005);
Sozei tokubetsu sochi ho [Special Tax Measures Act], Law no. 26
of 1957, Sec. 29-2.}



 


	Suppose executive Z obtains qualified options to buy 10
shares at 10x yen (10,000 yen) each in year 1.  With the shares
trading at 14x yen in year 4, he exercises the options and buys the
10 shares for 100x yen.  In year 5 he sells the stock for 220x yen.
He would pay no tax in years 1 and 4, but he would pay tax on his
capital gain of 220x yen - 100x yen = 120x yen in year 5.  By
contrast, suppose he obtained unqualified options.  He still would
incur no tax liability in year 1.  In year 4, however, he would have
taxable compensation income of (14x yen - 10x yen)10  =  40x
yen, and he would have capital gains of 220x yen - 140x yen  =
80x yen in year 5.

	To qualify for advantageous tax treatment, an option
program must stay within several limits.  The rules have changed
over time, but in 2004 a program qualified only to the extent that
an executive:  (a) used options to buy less than 12 million yen's
worth of stock (\$117,000) in a year; (b) could not exercise the
options less than 2 or more than 10 years after receiving them; (c)
could not transfer the options; and (d) received out-of-the-money
options, with an exercise price at least as high as the stock price at
the time of receipt.

	We take our information on the option programs outstanding
from Daiwa shoken SMBC (2005). 29.1\% of our firms have
option programs (see Table 2).  For each firm, we know when the
shareholders voted to authorize an option program.  We do not
know whether the program qualified under the tax code, or how
many options each executive received (to the best of our
knowledge, this information is simply unavailable).

	We doubt that Japanese executives earn much option income
not captured in our data.  After all, if a firm gave its CEO
unqualified options, he recognized taxable income (captured by
our dataset) in the year of exercise.  He avoided that recognition
(and inclusion in the dataset) only if the firm gave him qualified
options.  Of course, this does not mean the executives in our
dataset necessarily avoided option income.  Those with deep-in-
the-money options could have realized substantial untaxed
(because unrealized) gains even on unqualified options.  Recall,
though, that the Japanese stock market as a whole has been
volatile enough to make option value (and stock value) a very
noisy signal of performance.  From January 2000 to January 2005,
the Nikkei 225 fell from 18,937 to 11,458 (see
\url{http://www.econstats.com/eqty/eqem_mi_4.htm}, which helps
explain why corporations use options less in Japan than in
America.

	Most executives probably earned only modest amounts of
income through qualified options.  First, the exercise price on the
options had to be at least as high as the price of the stock at the
time the executive received the option.  Kato, Lemmon, Luo \&
Schallheim (2005: 443) peg the median exercise price of Japanese
options at about 5 percent above market prices.  Second, the
executive could use the options to buy only 12 million yen's worth
of stock (i.e., no more stock than he could obtain through an
aggregate exercise price of 12 million yen).  As a result, if the firm
used a qualified plan our data missed only the gain an executive
earned from an option to buy \$117,000 in stock.  Kato, Lemmon,
Luo \& Schallheim (2005: 444) estimate the median value of the
options upon grant at \$43,000 per board member.

	If Japanese firms focus on tax-qualified option programs, they
(like U.S. firms) seem to treat the options and cash compensation
as complements rather than substitutes:  they more often offer
options to high-income executives than to low.  Among the 593
firms with a president paying at least 10 million yen in taxes, 35
percent had adopted an option program by 2004.  Among the 286
firms with a president paying at least 20 million 45 percent had,
but among the 837 firms with a president paying less than 10
million only 25 percent had.  Put another way, among the 416
firms with option programs, half had presidents who paid at least
10 million in taxes; but among the rest, only 38 percent did.

  \noindent
{\bf     	5.  Other tax questions. }  Parenthetically, note the following:
in Japan, couples may not file joint returns; taxpayers with rising
incomes may not ``average'' their income across years; and pension
payments are taxed at lower rates than salaries.

	Understandably, wealthy Japanese resented the publication of
their tax liability.  To skirt disclosure, they could legally do one of
two things.  First, they could pay a penalty and submit their
returns late.  The tax office included on its list only those high-
income taxpayers who filed within 2 weeks of the March 15 tax-
return deadline.  By filing after April 1, they could avoid
publication.  Second, they could file an initial return that included
only income below the amount that triggered disclosure, and then
add an amended return that included the remaining income.
Because the tax office compiled its list only from the initial
returns, this would avoid publication.  We do not know how many
taxpayers used either strategy.\footnote{   We have at least two cross-checks on the prevalence of
avoidance strategies.  First, in a study of Japanese attorney
incomes, we have learned that one large law firm paid its equity
partners by a strict age-graded pay scale.  All of those equity
partners did indeed appear on the TSR list, and in almost every
case their tax liability matched their seniority.  See Nakazato,
Ramseyer \& Rasmusen (2007).  Second, we have independent
data on the salaries paid to Japanese baseball players.  64 percent
of the 173 players with salaries over 40 million yen appear on the
high-income taxpayer list, 76 percent of the 123 players with
salaries over 60 million, and 90 percent of the 84 players with
salaries over 80 million yen.}



 

 	As at least a weak check on the reliability of our data, we
compared an executive’s 2004 tax liability with the average land
price of the neighborhood in which he lived (obtained from Toyo
keizai shimpo sha, 2005c).  To maintain comparability, we limited
our sample to executives living in the greater Tokyo area.  If
reported incomes were completely unreliable as an indication of
true income, we would expect to find no correlation between
reported incomes and consumption. In fact, the correlation
coefficient between an executive’s 2004 tax liability and his
neighborhood’s land values  is 0.11 --- statistically significant at
better than the 1 percent level--- so executives reporting higher
incomes do live in more expensive neighborhoods.

	\newpage

\begin{center}
{\bf     	 	       Appendix II: The
Regression Variables}
\end{center}

  \noindent
{\bf     (a) Executive variables}\\
{\bf   Log(Tax Liability): }    the log of an executive’s 2004 tax
liability (in 1000 yen), as reported by TSR.  Executives not on the
TSR list paid less than 10 million yen, and for them, we enter the
log of 10,000.\\
	{\bf   $\Delta$  Tax Liab: }    the increase in an executive's tax liability from
2003 to 2004.\\
	{\bf  High Income TP: }    1 if the executive paid at least 10 million
yen in taxes in 2004; 0 otherwise.\\
{\bf  	Num Appearances: }    the number of times the executive
appeared on the high-income taxpayer list (including 2004, but
conditional on appearing on the 2004 list).\\
{\bf  	Multiple Positions:  }   1 if the executive holds positions in at
least two firms; 0 otherwise.\\
{\bf  	Exec Share Value:  }   the value of the firm’s shares held by the
executive in millions of yen, but 0 if the executive is not one of
the top 10 shareholders.\\
{\bf  	Exec Age:  }   2005 minus the executive’s year of birth.

\bigskip \noindent
{\bf     	(b) Corporation variables}\\
{\bf  	Log(Capitalization):  }   the log of the value of the firm’s stock,
as of the close of the calendar 2004 year.\\
{\bf  	Log(Mean Capitalization):  }   the log of the mean capitalization
for all firms in a given industry.\\
{\bf  	Log(Assets):}  the log of the firm’s assets in for the fiscal year
ending in 2005, in 100 million yen.\\
{\bf  	Log(Sales): }    the log of the firm’s sales (for the fiscal year
ending in 2004; consolidated), in 1 million yen.\\
{\bf  	  Sales: }    the fractional increase in the firm’s sales from the
fiscal year ending in 2003 to the year ending in 2004.\\
{\bf  	Profitability: }    the firm’s operating income (for the fiscal year
ending in 2004; million yen) divided by its assets (fiscal year
ending in 2005; million yen) times 100.\\
{\bf  	$\Delta$  Profitability:  }   the fractional increase in Profitability from
the fiscal year ending in 2003 to the year ending in 2004.\\
{\bf  	Relative Profitability:  }   the difference between the firm's
Profitability and the mean Profitability for all firms in its industry.\\
{\bf  	Negative Profitability:  }   1 if a firm's Profitability was negative,
0 otherwise.\\
{\bf  	Stock Price Growth: }    the fractional increase in the price of
the firm’s stock, from June 2003 to June 2004.  We do not correct
for splits, redemptions, or dividends.\\
{\bf  	SEC Accounting:  }   1 if the firm reported its financials by U.S.
accounting principles in 2004.  Of the 1,568 firms in our database,
66 chose to do so.\\
{\bf  	Option Program: }    1 if the firm had a stock option program by
the end of 2004; 0 otherwise.\\
{\bf  	Industry dummies:  }   One of 32 industries given by Toyo
keizai simpo sha (2005b).

\bigskip \noindent
{\bf     	(c) Corporation governance variables (for 2004):} \\
	{\bf  Family Company:  }   1 if at least two board members had the
same last name, or the firm’s name (e.g., Casio) was the same as
that of at least one board member (e.g., Kashio).\\
	{\bf  Top 5 share \%:  }   the percentage of the firm’s shares held by
the largest 5 shareholders (at the close of the fiscal year ending in
2005).\\
{\bf  	Other Board Share \%: }    the total percentage of the firm’s
shares held the members of the board other than the executive.\\
{\bf  	Board age: }    the mean age of the members of the board.\\
{\bf  	Board tenure: }    the mean tenure of the members of the board.\\
{\bf  	Board size: }    the number of directors on the board.\\
{\bf  	Ind dir \%: }   the percentage of directors with past or
concurrent positions at other firms in 2004.  This is a broader
definition than that used in the statute governing the new
governance structure. That definition excludes any director with a
past tie to an affiliated firm -- a definition that is hard for the
outside researcher to apply without a complete work history for
each director; see generally Kanda (2006: 83).



\newpage

 \oddsidemargin -.8in
\begin{scriptsize}
\begin{center}
{\bf Table 1\\
 Estimating a Taxpayer’s Income from His Tax Liability}
\end{center}

		The amount of income that would generate a tax
liability of 10 million yen is about 39.9 million yen.  To reach this
conclusion, we make the following calculations:

\noindent
{\it A.  The Principles:}

\noindent
		1.  Assume the taxpayer has only salary income.  If so,
he will have the standard salary income deduction of 5 percent
plus 1,700,000 yen.  See Shotoku zei ho [Income Tax Act], Law
No. 33 of 1965, Sec. 28.

\noindent
		2.  Assume further that this taxpayer has no children, no
life insurance, no charitable donations, no medical expenses, etc.
If so, he will have only the three basic personal deductions:  his
own deduction, his spouse' deduction, and a social security
deduction.  Assume the last equals 1 million yen (in fact, it varies
by salary level).  See Shotoku zei ho, Secs. 74, 83, 86.
 
\begin{tabular}{lr}
		* Basic personal deduction &	  380,000 $\;$ yen\\
		* Spousal deduction	&  380,000$ \;\;\;\;\;\;\;\;$ \\
		* Social security deduction	&1,000,000 $ \;\;\;\;\;\;\;$ \\
\end{tabular}

\noindent
		3.  A taxpayer with an income in this range will face the
full maximum marginal rate:  37 percent.  The actual amount of
the tax is given as 37 percent of his income, less a deduction of
2.49 million yen.

\noindent
		4.  This taxpayer will also have the currently standard
lump-sum tax credit of 250,000 yen.  Shotokuzei to futan keigen
sochi ho [Act to Reduce the Burden of the Income Tax], Law. 8 of
1999, Sec. 6.

\bigskip
\noindent
{\it B.  Tax calculation:}

\begin{tabular}{rr}
\multicolumn{1}{l}	{	Gross income:	}&	39,900,000\\
 & \\
\multicolumn{2}{l}	{	Salary income:	}\\
	   39,900,000 x .95 - 1,700,000& =	36,205,000\\
 & \\
\multicolumn{2}{l}	{Taxable income:}	 \\
	 36,205,000	&\\
	      380,000	&\\
	      380,000	&\\
\underline{	  - 1,000,000}	&\\
	   34,445,000	&	34,445,000\\
 & \\
\multicolumn{2}{l}	{	Income Tax:	} \\
	   34,445,000 x .37 - 2,490,000 &= 	10,254,650\\
 & \\
\multicolumn{2}{l}	{	Less lump-sum tax credit:		}\\
	   10,254,650 - 250,000 & = 	10,004,650\\
\end{tabular}
 
\newpage 


 

\begin{center}
{\bf Table 2\\
Corporations and Their Presidents: Summary Statistics}
\end{center}

\begin{tabular}{l r r rr  }
 {\bf A. Corporations}&  &  &  &   \\
 &   	 Percent  &Minimum& Median   &  	Maximum \\
  &  &  &  &   \\
\hline
  &  &  &  &   \\
Assets (in 100 million yen)	  & &	14&	878.5&	344889\\
Profitability (oper inc/cap)   &	 &	-1.00	&.52	&10.88\\
Stock Returns (04-03)  &	 &	-.99&	.18&	7.39\\
Family corp. (def. in App.)   &27.3  &   &&	\\
Largest shareholder is corp  & 86.6 &  &. &	\\
Option Programs &	29.1     &  &  &   \\
  &  &  &  &   \\
  &  &  &  &   \\
{\it Percent shares held by: } &  &  &  &    \\
\hspace{6pt}	Largest shareholder  &	 &	3.1&	11.9&	90.6\\
\hspace{6pt}	Largest 5 shareholders	  & &	7.5&	33.9&	98.2\\
\hspace{6pt}	Largest 10 shareholders	  & &	9&	45.9	&98.9\\
\hspace{6pt} Board (excl. executive)	& &	0&	.50	&60.5\\
  &  &  &  &  \\
  &  &  &  &  \\
   &  &  &  &\\
{\it Boards:} &  &  &  &\\
\hspace{6pt}	Size &		 &	5	&13&	55\\
\hspace{6pt}	Percent outside director  & 	 &	0&	37.5&	100\\
\hspace{6pt}	Average age	   & &	38.3&59.6&	72.1\\
  &  &  &  &   \\
\hline
  &  &  &  &   \\
  &  &  &  &   \\
   &  &  &  &   \\
{\bf B. Presidents}  &  &  &  &\\
          &          	 Percent  &     Minimum & 	  Median&  Maximum\\
 &  &  &  &   \\
\hline
  &  &  &  &   \\
Tax paid (if on TSR list; 1000 yen) &	& 	10,003& 	19,662 & 
1,083,937\\
Age		 && 		33& 	61.6& 	90\\
Years on the tax list & 	 	& 1& 7.3	& 33\\
\% holding multiple positions	 &11.7 & && \\
\% of employer’s shares held   &  & 	0& 	0	& 60.7  \\
   &  &  &  &   \\
\hline 
\end{tabular}

\noindent
	{\it Sources:}  Tokyo shoko risaachi, Zenkoku kogaku nozeisha
meibo:  Jojo gaisha ban [Roster of High-Income Taxpayers] (CD-
ROM, 2005); Toyo keizai shimposha, Yakuin shikiho [Board of
Directors Report:  Listed Companies] (Toyo keizai shimposha,
2005); Nihon keizai shimbun sha, Nikkei kaisha joho:  Natsu
[Nikkei Corporate Information:  Summer] (Tokyo:  Nihon keizai
shimbun sha, 2005); Toyo keizai shimposha, Kabuka chaato:
Natsu [Stock Price Charts:  Summer] (Tokyo:  Toyo keizai
shimposha, CD-ROM, 2005); Toyo keizai shimposha, Kaisha
shiki ho:  Natsu [Corporate Report:  Summer] (Tokyo:  Toyo
keizai shimposha, CD-ROM, 2005); Toyo keizai shimposha,
Yakuin shikiho:  jojo gaisha ban [Board of Directors Report:
Listed Companies] (Tokyo:  Toyo keizai shimposha, 2005). 

\newpage

\begin{center}
{\bf Table 3\\
                             The Incomes of Top Corporate Officers}
\end{center}

	``High-income roster'' refers to all taxpayers paying more than
10 million yen in taxes in 2004. ``Estimated taxable income'' is
calculated by estimating the taxable income that would generate
the amount given, and converting to \$U.S. at the December 31,
2004 rate of 102.68 yen/\$.  We assume the taxpayer has three
personal deductions:  a basic deduction of 380,000 yen, a
deduction for spouse of 380,000 yen, and a deduction for social
security of 1,000,000.``Highest paid officer'' is the higher paid of
the two directors listed first in the rosters given in the Yakuin
shikiho, taken from securities filings.  ``Top 2 officers'' are the two
directors listed first in the board rosters given in Yakuin shikiho,
taken from securities filings. The data set includes all firms listed
in Section 1 of the Tokyo Stock Exchange except banks. Note that our findings in Table 4 will suggest that incomes
on average exceed executive compensations by some 40\%.



\begin{tabular}{l lr rr  }
{\it A.  Median Amounts and Ranks:} &  &  &  &\\
&	Percentage in& 	Median   &     	Taxpayer       &  	Median\\
&	High-Income& 	Tax Liability& 	 Rank& 	Estimated Taxable
Income\\
 &	Roster& 	(x 1,000 yen)	&  (All)&\\
   &  &  &  &   \\ 
\hline
 &  &  &  &   \\
{\it 1.  Highest Paid Officer:}    &&&&  \\
  &  &  &  &   \\
   Top 100 & 	77.0	& 17,997 & 	26,412	& U.S. \$610,031\\
   Top 500	& 65.4	& 15,554	& 35,092	 &        \$542,345\\
   Al1& 	51.8& 	10,483& 	70,139	       &  \$401,013\\
  &  &  &  &   \\
{\it 2.  President (rank):}&&&&\\
  &  &  &  &   \\
   Top 100 & 	67.9& 	15,259& 	35,092& 	       \$534,164\\
   Top 500	& 53.3& 	11,152& 	63,183& 	       \$420,374\\
   All  & 	41.4	&   --\\
  &  &  &  &   \\
{\it  3. Top 2 Officers}:&&&&\\
  &  &  &  &   \\
   Top 100 & 	50.1	& 10,508	& 69,508	  &     \$402,532\\
   Top 500& 	42.2& 	  --\\
   All  & 	31.5& 	  --\\
  &  &  &  &   \\
\hline
  &  &  &  &   \\
  &  &  &  &   \\
  &  &  &  &   \\
{\it B.  Selected High-Income Executives:}&&&&\\
     	&	&            Tax Liability	 &         \multicolumn{2}{c}{Rank among:}	 \\
 Name	   &     Position	&    (x 1,000 yen)& 	 Executives&  All taxpayers\\
  &  &  &  &   \\
\hline
   &  &  &  &   \\
Tadashi Yanai	 &  Chairman, Fast Retailing	&   1,083,937	&     1& 
3\\
Yasumitsu Shigeta& 	  Chairman, Hikari Comm.    & 	     549,430& 
5& 	 29\\
Masaya Nakamura	&   Chairman, Namuko (Services)& 
375,799& 	 10& 	 68\\
Hidetoshi Yasukawa & 	   Pres., Gold Crest (Real est.)& 
205,219 & 	 20& 	224\\
Yoshihiko Miyauchi   	&   Chairman, Orix (Financial)& 
142,847& 	 35	& 422 \\
  &  &  &  &   \\
\hline 
\end{tabular}

\noindent
{\it 	Sources}:  Tokyo shoko risaachi, Zenkoku kogaku nozeisha
meibo:  Jojo gaisha ban [Roster of High-Income Taxpayers] (CD-
ROM, 2005); Toyo keizai shimposha, Yakuin shikiho [Board of
Directors Report:  Listed Companies] (Toyo keizai shimposha,
2005).

\newpage


\begin{center}
{\bf Figure 1\\
The Distribution of Taxes Paid by Corporate Presidents}

 

 \includegraphics{exec1.jpg}
 \end{center}

\noindent
	{\it Note:}  The figure gives the fraction of the 504 presidents of
firms listed in Section 1 of the Tokyo Stock Exchange who pay
various levels of taxes, excluding those who pay less than 10
million or the 89 who earned more than 50 million yen.  The
horizontal bins are in 2- million yen increments.  Source:  Tokyo
shoko risaachi, Zenkoku kogaku nozeisha meibo:  Jojo gaisha ban
[Roster of High-Income Taxpayers] (CD-ROM, 2005).


\newpage

\begin{center}
{\bf Table4\\
 The Incomes of Capitalists and Company Men: Levels}
\end{center}

 
``High-income roster'' refers to all taxpayers paying more than 10
million yen in taxes in 2004. ``Capitalists" are presidents who are
among the top 10 shareholders of the firm, or who work at their
own family firm (as defined in the Appendix).  ``Company Men"
are all other presidents.  Banks are excluded.  For sources, see
Table 2.
 
\begin{tabular}{l rr rr rr }
	{\it I.  Summary Statistics: }& & & & & &\\
       &            \multicolumn{3}{c}{      Capitalists  }     &            \multicolumn{3}{c}{	               Company
Men            }     \\
  &  &  &  &  &  &\\
 	 &\%   & 	Median	& 	\%& 	Median & & \\
 &	 High-Income& 	Tax Liability	&& 	High-Income	& Tax Liability & \\
  &	Roster& 	(x 1,000 yen)& n& 	Roster& 	(x 1,000 yen) &  
n   \\
  &  &  &  &  &  &\\
\hline
  &  &  &  &  &  &\\
   Top 100 & 	100  &	209,180 &  	   4	& 67 	& 14,289	&     73\\
  &  &  &  &  &  &\\
   Top 500	& 75& 	  22,185	&   55& 	50& 	10,005& 	  362\\
  &  &  &  &  &  &\\
   All	& 66	&   57,409	& 383	& 32& 	--& 	1047\\
 &  &  &  &  &  &\\
\hline
\end{tabular}

\vspace{56pt}


\begin{tabular}{lrr rrr  rrr }
	\multicolumn{9}{l}{\it II.  Number of Presidents Paying Taxes Above (Million Yen)}      \\
     &	10& 	30& 	50	& 70	& 90 & 	110& 	130 &        All\\
  &  &  &  &  &  &\\
\hline
  &  &  &  &  &  &\\
   Capitalists& 	254& 	137& 	78& 	48	& 28& 	21	& 17& 	   383\\
  &  &  &  &  &  &\\
   Company Men	& 339& 	  35& 	11	 &  6	&   6	&   3	&   2	&  1048 \\
   &&&    & & && &\\
\hline 
\end{tabular}


\newpage


   \begin{center}
{\bf      Table 5\\
Determinants of the Taxable Income of Corporate Presidents}
\end{center}

The dependent variable is Log Tax Liability, and the regressions
are tobit, using Stata 9.  All regressions include industry dummies.
The data cover all non-bank firms listed on Section 1 of the
Tokyo Stock Exchange.  Under the coefficients are the absolute
values of the corresponding z statistics.  Significant effects are
boldfaced, and given one, two and three stars for significance at
the 10\%, 5\%, or 1\% levels. The ``Capitalist Extra Effects''
columns represent the coefficient on the interaction variable
X*(Capitalist dummy) -- that is, the additional effect of the
executive being a Capitalist.  "Capitalists" are corporate presidents
who either are among the top 10 shareholders of the firm or who
work at their own family firm (as defined in the Appendix).
"Company Men" are all other corporate executives.  For sources,
see Table 2.  The number of observations varies from 1,345 to
1,352.

 \begin{tabular}{lrr rrr   rr}
	&  (a)& 	(b)(i)	&  (b)(ii)	& (c)(i)	&  (c)(ii)& (d)(i)&  (d)
(ii)\\
	&&	Company& 	Capitalist& 	Company	& Capitalist& 	Company & 
Capitalist\\
	&&	  Men& 	Ext effect& 	  Men& 	Ext effect& 	  Men  & 	Ext effect\\
  &  &  &  &  & & &   \\
\hline
  &  &  &  &  & & &   \\
Constant& 	{\bf ***7.569} & 	{\bf ***6.732}& 	{\bf **.805}	&{\bf ***5.561}& {\bf **1.376}& 
{\bf ***6.707}& 	.257\\
& 	(31.27)& 	(27.08)& 	(1.98)& 	(11.82)& 	(2.16)	& (8.04)& 
(0.21)\\
Log (Assets)& 	{\bf ***.180} 	& {\bf ***.263}	& .034&	{\bf ***.217}& 	-.027&  {\bf ***.237}	& .001\\
& 	(6.08)& 	(8.87)& 	(0.60)& 	(7.54)	& (0.48)& (7.17)& 
(0.02)\\
Profitability& {\bf ***.047}& 	{\bf ***.034}& 	.010& {\bf ***.034}& 	.010& {\bf ***.029}& 
.001\\
& 	(6.87)& 	(4.57)& 	(0.83)& 	(4.78)& 	(0.83)	& (4.00)& 
(0.09)\\
Stock Price Gr	  & .019& 	-.134& {\bf **.278}& 	-.109&{\bf **	.234}& 	-.078& 
.124\\
	& (0.29)	& (1.63)	& (2.27)& 	(1.38)& 	(2.00)& 	(1.00)& 
(1.06)\\
  &  &  &  &    & & &   \\
Multi Positions	& & & 	&{\bf ***.395}& 	-.268	&{\bf ***.404}& 
{\bf *-.315}\\
		& & & 	& 	(3.92)& 	(1.40)& (4.11)	& (1.70)\\
Option Program & & & 	& 	{\bf .187}& 	-.153& 	 {\bf *.150}& 
-.120\\
			& & & 	& 	(2.32)	& (1.18)& 	(1.91)& 	(0.94)\\
Executive Age			& & & 	& {\bf ***.022}	& -.002& 	{\bf ***.027}& 	-.006\\
		& & & 	& 	(3.37)& 	(0.24)& 	(3.79)& 	(0.63)\\
  &  &  &  &    & & &   \\
Exec Share Value	 	 &  &  &  &	& 	 &		{\bf ***.078}	& {\bf ***.061}\\
 	 &  &  &  &	& 			&	(5.75)	& 	(4.52)\\
Other Family Co	 	 &  &  &  &	& 			&	{\bf **-.234}& 	.130\\
		 	 &&&    && 			&  			(2.28)& 	(0.44)\\
Top 5 Shareh \%	 	 &&&  &&&	{\bf*-.005}	&{\bf ***.020}\\
 	 &&&    &&& 		(1.65)& 	(3.85)\\
Board Tenure	 	 &  &  &  &	& 			& 	{\bf ***.089}& {\bf **	-.059}\\
					 &  &  &  &	& 			& 	(5.61)& 	(2.53)\\
Board Age			 &  &  &  &	& 	 &		{\bf **-.035}	& .009\\
 	 &  &  &  &	& 			&		(2.29)& 	(0.42)\\
Oth Board Sh \%	  &  &  &  &	& 			&	 		.01& 	-.004\\
 	 &  &  &  &	& 			& 	(1.44)	& (0.42)\\
Board Size				 &  &  &  &	& 			& 	.008& 	.006\\
 	 &  &  &  &	& 			& 	(1.08)	& (0.40)\\
Ind Director \%	 &  &  &  &	& 			&	.001& 	.003\\
 	 &  &  &  &	& 			& (0.67)& 	(0.85)\\
  &  &  &  &    & & &   \\
SEC Accounting& 	.396	& .219&	& .265	&	& .245 &\\
                        & 	(1.45)	& (0.95)	& &	(1.21)	&& 	(1.16)&\\
  &  &  &  &    & & &   \\
\hline 
\end{tabular}

\newpage
 \begin{scriptsize}

\begin{center}
      {\bf   Table 5a \\
Determinants of   Taxable Income  in Japan and the United States}
\end{center}
    The dependent variable is Log Tax Liability. The Japanese coefficients are taken from the Company Men columns of Table V. The American regressions  are from Compustat data, and have 1,606, 1,127, and 1,043 firms in the three regressions.  

\begin{tabular}{l rr rr rr }
 &  (a) (i)&  (a) (ii) &  (b) (i) &  (b) (ii) &  (c) (i) &  (c) (ii) \\
 &  Japan & USA &  Japan &  USA &  Japan &   USA \\
 & & & & & & \\
\hline
 & & & & & & \\
Constant  &{\bf ***6.732} &{\bf ***5.222} &{\bf ***5.561} & {\bf ***5.670}&{\bf ***6.707}&{\bf ***5.190} \\
 &(27.08) & (46.97)&(11.82) &(27.05) &(8.04) & (11.00)\\
 & & & & & & \\
Log (Assets)  &{\bf ***.263} &{\bf ***.791}  &{\bf ***.217} &{\bf ***.793} &{\bf ***.237}&{\bf ***.908} \\
 &(8.87) &(24.01) &(7.54) &(23.20) &(7.17) & (17.39) \\
 & & & & & & \\
Profitability &{\bf ***.034}&{\bf ***.015} &{\bf ***.034}&{\bf ***.016} &{\bf ***.029}&{\bf ***.029} \\
 &(4.57) &  (7.21) &(4.78) &(7.10) &(4.00)&(8.46) \\
 & & & & & & \\
Stock Price Gr &-.134  &  {\bf *** .002} &	-.109 &{\bf ***.002 } &-.078  &{\bf ***.267}\\
	           &(1.63) &	(2.68) &	(1.38) &(2.60) &	 	(1.00) &	(3.60)\\
 & & & & & & \\
Multi Positions		   & &&		{\bf ***.395}	 & &  	{\bf ***.404}	&\\
			&	 & &(3.92)	 & &	(4.11)& 	 \\
 & & & & & & \\
Option Program		   & &&		{\bf **.187}  & &   	{\bf *.150}&	 \\
			& & &	(2.32)	 & & 	(1.91)& \\
 & & & & & & \\
Executive Age		 & &	&	{\bf ***.022}	 &{\bf ***-.008 }&{\bf ***	.027} &	-.003\\
		&	 & &	(3.37) &	(2.45) &	(3.79) &	(0.73)\\
 & & & & & & \\
Exec Share Value	  && 	&&&		{\bf ***	.078}	&	{\bf **-.000}\\
				 && 	&&&	(5.75)	&	(2.30)\\
 & & & & & & \\
Other Family Co		 && 	&&&					{\bf **-.234}&  \\
			 && 	&&&				(2.28)&	 \\
 & & & & & & \\
Top 5 Shareh \%			 && 	&&&			{\bf *-.005}	&.000\\
					 && 	&&&			(1.65)&	(0.06)\\
 & & & & & & \\
Board Tenure			 && 	&&&			{\bf ***.089}&{\bf ***-.022}\\
					 && 	&&&		(5.61)&	(2.60)\\
 & & & & & & \\
Board Age			 && 	&&&			{\bf **-.035}&	.001\\
				 && 	&&&		(2.29)&	(0.09)\\
 & & & & & & \\
Oth Board Sh \%		 && 	&&&				.011&	-.001\\
			 && 	&&&		(1.44)	&(0.21)\\
 & & & & & & \\
Board Size	 && 	&&&				.008&	{\bf ***-.043}\\
				 && 	&&&		(1.08)&	(3.19)\\
 & & & & & & \\
Ind Director \%   && 	&&&	 	.001&{\bf *.004}\\
					 && 	&&&		(0.67)&	(1.92)\\
 & & &  & & & \\
SEC Accounting	& 	.219	&&	.265	&&	.245&\\
                &      	(0.95)		&&		(1.21)		&&		(1.16)	&\\
 & & & & & & \\
\hline
\end{tabular}

    \end{scriptsize}


\newpage


\begin{center}
{\bf 
 Table 6\\
Determinants of Changes in Taxable Income}
\end{center}

The dependent variable is    Tax Liab. The regressions are OLS
and are limited to presidents of non-bank firms  listed on Section
1 of the Tokyo Stock Exchange  who paid at least 10 million yen
in taxes in both 2003 and 2004.  Columns (b) and (c) include only
presidents with income changes in the 5th to 95th percentiles.
Under the coefficients are the absolute values of the
corresponding z statistics.  Significant effects are boldfaced, and
given one, two and three stars for significance at the 10\%, 5\%, or
1\% levels. The ``Capitalist Extra Effects'' columns represent the
coefficient on the interaction variable X*(Capitalist dummy)-- that
is, the additional effect of the executive being a Capitalist.
"Capitalists" are  either are among the top 10 shareholders of the
firm or work at their own family.  For sources, see Table II. 

  

\begin{tabular}{l rr rr  rr }
&   (a)(i)& 	   (a)(ii)& 	   (b)(i)& 	   (b)(ii)        &        (c)(i)& 	   (c)(ii)         \\       		
& Company Men	& Capitalist& 	Company Men& 	Capitalist& 	Company Men	& Capitalist		\\
&   	extra effect&  effect	&  	extra effect & effect & extra effect & effect	\\	
  &  &  &   &   &  &  \\	
\hline
		  &  &  &   &   &  &  \\				
Constant& 	3582.664& 	-3396.615& 	{\bf ***3239.506}& 	-739.883	& {\bf ***3476.441}& 	-756.271	\\	
	& (0.99)& 	(0.79)& 	(4.30)& 	(0.79)& 	(2.63)& 	(0.80)\\	
  &  &  &   &   &  &  \\				
$\Delta$  Profitability& 	0.001& -0.006	      & {\bf ***700.051}& {\bf ***-825.285}	&{\bf ***714.178}& {\bf ***-801.478}		\\
& 	(0.03)& 	(0.18)& 	(2.61)& (2.51)	& (2.63)& 	(2.42)	\\	
  &  &  &   &   &  &  \\							
$\Delta$    Sales& 	80.419	& 1681.041& 	114.617	&{\bf **6165.561}& 	102.952	& {\bf **6072.977}		\\
& 	(0.03)& 	(0.43)& 	(0.18)	& (2.24)& 	(0.16)& 	(2.18)	\\	
  &  &  &   &   &  &  \\							
Stock Price Growth&	-1744.773&{\bf ***19472.22}&	-1583.435&{\bf *2776.607}&	-1765.731&{\bf *	2755.631}		\\
&	(0.27)	&(2.60)	&(1.19)&	(1.69)&	(1.32)	&(1.66)\\	
  &  &  &   &   &  &  \\								
SECActg&	-11610.53&	&{\bf ***0.483}&&&	\\				
	&(1.16)	&	&(3.85)	&&&	\\		
  &  &  &   &   &  &  \\
  &  &  &   &   &  &  \\								
 R$^2$&	0.06	&&	0.05		&&0.04	&	\\	
Observations&	439	&	&403	&&	403	&	\\	
  &  &  &   &   &  &  \\
\hline 
\end{tabular}				
								

 
 \newpage
\begin{scriptsize}
 
\begin{center}
{\bf 
Table  7\\
  Determinants of Taxable Income:
Alternative Measures of Size and Performance}
\end{center}

The dependent variable is Log Tax Liability, and the regressions
are tobit.  All regressions include industry dummies except Reg
(d), which would not converge with them.  The data cover all non-
bank firms listed on Section 1 of the TSE.   Significant effects are
boldfaced, and given one, two and three stars for significance at
the 10\%, 5\%, or 1\% levels.  Z-statistics appear in parentheses.
The second column of each series (e.g., (aii)) gives the "Capitalist
Extra Effects" --- the coefficient on interaction variable
X*(Capitalist dummy).  This gives the additional effect of the
executive being a Capitalist.  ``Capitalists" are corporate presidents
who either are among the top 10 shareholders of the firm or work
at their own family firm (as defined in the Appendix) ``Company
Men" are all other corporate executives.  For sources, see Table 2.
The number of observations varies between 1,345 and 1,347.

\begin{tabular}{l rrr rrr rrr  r }
&	(ai)& 	(aii)	& (bi)	& (bii)& 	(ci)	& (cii)	& (di)& 	(dii)& (ei)& 	(eii)\\
	&   \multicolumn{2}{c}{  Assets} 	&   \multicolumn{2}{c}{ Capitalizations} 	&   \multicolumn{2}{c}{Sales} 	&   \multicolumn{2}{c}{  Mean Capitalizations} 	&   \multicolumn{2}{c}{Rel
Profit'y }  \\
  &&&  &&&  &&&  &  \\
\hline 
  &&&  &&&  &&&  &  \\
Constant&{\bf ***5.561}	&{\bf **1.376}&{\bf ***3.153}&{\bf ***2.447}&{\bf **4.757}&	{\bf ***1.770}&
2.930	&2.971	&{\bf ***5.261}&	.998\\
	&(11.83) &(2.16) 	&(5.22) &	(2.60) &	(8.82) &	(2.28) & (2.87) 	&(1.62)&	(7.81) &(1.43)\\
 &&&  &&&  &&&  &  \\
Ln(Assets)&{\bf ***.217}&	-.027	&						.215&{\bf ***-.020}\\
&	(7.54) &(0.48)&							(7.45)& (0.35)\\
Ln(Capitalizat'n)	&	&	{\bf ***.252}&	-.075		&	{\bf ***.241}&	-.054\\
	&	&	(9.19) &	(1.42)	&		(8.88) &	(1.02)\\
Ln(Sales)				&&	&{\bf ***.194}&	-.059\\
			&	&&	(6.76) &	(1.10)\\
Ln(Mean Capital'n)			&	&&&				.029&	-.054\\
						&	&&&	(0.50)	&(0.53)\\
 &&&  &&&  &&&  &  \\
Profitability	&{\bf ***.034}	&.010&{\bf ***.015}&{\bf ***.011}&	.028	&{\bf ***.011}	&.019&	.010&	.112&	.061\\
	&(4.78) &(0.83)&	(2.11) 	&(0.95)	&(3.93) &	(0.96)&(2.67) &	(0.92)&	(1.13)	&(1.50)\\
Rel Profitability	&&&  &&&  &&&  		-.077 &	-.055\\
&&&  &&&  &  	(0.77)	&(1.32)&\\
Stock Price Growth&	-.109&{\bf **.234}&	-.127&	{\bf **.241}&	-.102&	{\bf **.242}&-.089&{\bf *.220}&	-.113&{\bf **.232}\\
&	(1.38)	&(2.00) 	&(1.61)	&(2.07) 	&(1.31)&(2.08) &(1.23)	&(1.93) &	(1.42)&(1.98) \\
 &&&  &&&  &&&  &  \\
Multi Offices&	{\bf ***.395}&	-.268&{\bf ***.376}&	-.249&	{\bf ***.428}&	-.274&	{\bf ***.367}&-.288	&{\bf ***.403}	&-.287\\
	&(3.92) &(1.40)&	(3.79) &	(1.32)	&(4.23) 	&(1.42)&(3.80) &	(1.53)	&(4.00) &(1.50)\\
Option Program&	{\bf **.187}&	-.153&	.123&	{\bf **.111}&	.197&	{\bf *-.165}&	.153&-.133&	{\bf **.194}&	-.176\\
&	(2.32) 	&(1.18)&	(1.53)&	(0.87)&(2.42) &(1.26) &(1.93)&	(1.03)	&(2.40) &(1.34)\\
Executive Age&	{\bf ***.022}&	-.002&{\bf ***.025}&	-.005&{\bf ***.022}&	-.001	&{\bf ***.023}&{\bf ***-.003}&	.021&	-.001\\
&	(3.37) &(0.24)&	(3.95) 	&(0.56)&	(3.38) &	(0.11)&(3.61) &(0.38)	&(3.27) &(0.15)\\
Exec Share Value	 &&{\bf ***.078}	&{\bf ***.071}	&{\bf ***.083}	&	{\bf ***.076}&{\bf ***.079}  &&&  & \\
  &	& (5.75) &	(5.23) 	&	(6.22) 	&(5.50) &(5.83)   &&  && \\
 &&&  &&&  &&&  &  \\
SEC accounting& 	.265	&	&.202	&&	.410	& &{\bf *.265}	&	&.267  & \\
 			&	(1.21)	&	&(0.95)	&     &	(1.88) 	&&	(1.26) &&(1.22)   & \\
  &&&  &&&  &&&  &  \\
\hline 
\end{tabular}
\end{scriptsize}
\newpage

\begin{center}
{\bf 
Table 8\\
Determinants of Income:  Alternative Regressions}
\end{center}

   	All regressions include industry dummies.  The data cover
non-bank firms listed on Section 1 of the TSE.  We omit z- and t-
statistics, and bold-face significant effects and attach one, two and
three stars for significance at the 10\%, 5\%, or 1\% levels.  For
sources, see Table 2.

\noindent
{\it Panel A:  Alternative Regression Techniques }

\begin{tabular}{lrr rrr rrr  }
      &   \multicolumn{2}{c} {(a)}	&  \multicolumn{2}{c} { (b)}	&    \multicolumn{2}{c} {(c)	}       &  \multicolumn{2}{c} {(d)}\\
 Dep. Variable: &        \multicolumn{2}{c} {   Ln Tax Liab   }	&  \multicolumn{2}{c} {    Ln Tax Liab }	&  \multicolumn{2}{c} {        High Inc TP   }	&  \multicolumn{2}{c} {   No. Appearances}	   \\
&	Co Men&	Cap ExEt	&Co Men&	Cap Ex Eft&	Co Men&
Cap Ex Eft&	Co Men &	Cap Ex Eft\\
  &&& &&& &&   \\
\hline 
  &&& &&& &&   \\
Constant&	{\bf ***5.561}&	{\bf **1.376}	&&	.082		&{\bf ***.720}	&	&-.438\\
  &&& &&& &&   \\
Log (Assets)&{\bf ***	.217}&	-.027&	{\bf ***.097}&	.060&	{\bf ***.101}&	-.045&
-.021&	{\bf ***.220}\\
  &&& &&& &&   \\
Profitability&{\bf ***.034}	&.010&	{\bf ***.032}&	.008&	{\bf ***.012}&-.000&
.008&	-.005\\
  &&& &&& &&   \\
Stock Pr Gr&  	-.109	& {\bf ***.234}&  	-.090&{\bf **.214}&  	-.032&  
.043&  	{\bf *-.105}& {\bf **.159}\\
  &&& &&& &&   \\
Multi Positions&  {\bf ***.395}&  	-.268&  	-.020&  	-.156&  
{\bf ***.259}&  	-.041	&{\bf ***.321}&  {\bf ***-.500}\\
  &&& &&& &&   \\
Option Program& {\bf **.187}&  	-.153&  	.010	&  .073&  	{\bf **.096}&  
{\bf *-.116}&  {\bf ***	-.201}&  	{\bf **.149}\\
  &&& &&& &&   \\
Executive Age&  	{\bf ***.022}&  	-.002	&  .005&  	.000&  	{\bf ***.013}&  	-.003&  
{\bf ***.037}	&  -.005\\
  &&& &&& &&   \\
Exec Sh Value	    &  	& {\bf ***.078}	&&  	{\bf ***.065}	& & 	.033	& & 	-.009\\
  &&& &&& &&   \\
SEC Accounting  &	.265	& & 	.133	&	&  .144	&  &	{\bf *-.200}\\
  &&   & &&  & &&   \\
  &&& &&& &&   \\
Technique used:  & \multicolumn{2}{c} {Tobit}	&  \multicolumn{2}{c} {OLS (R$^2$=.43)}	&  \multicolumn{2}{c} {Probit  }	&  \multicolumn{2}{c} {Poisson}	   \\	   
  &&& &&& &&   \\
\hline 
\end{tabular}

\noindent
   {\it   Notes:}
     Regressions (b) and (d) are limited to those executives who
paid at least 10 million yen in taxes in 2004. 
     Regression (c) gives the marginal effect of the variables rather
than the coefficients. 
     The ``on variable X*(Capitalist dummy) --- that is, the additional
effect of the executive being a Capitalist. 
     ``Capitalists" are corporate presidents who are among the top
10 shareholders of the firm, or who work at their own family firm
(as defined in the Appendix).  ``Company Men" are all other
corporate executives.

\newpage

\noindent
{\it Panel B:  Alternative Capitalist Definitions}  ({\it  Dependent variable:}    Ln Tax Liability. {\it 
Technique used:}    Tobit)


\begin{tabular}{lrr rrr rrr  }
  Capitalist:	&   \multicolumn{2}{c}{ Alt. 1}	&     \multicolumn{2}{c}{ Alt. 2}	&     \multicolumn{2}{c}{Alt. 3}	&     \multicolumn{2}{c}{Alt. 4} \\
& 	Co Men& 	Cap ExEft& 	Co Men& 	Cap Ex Et& 	Co Men& 
Cap Ex Eft& 	Co Men & 	Cap Ex Eft\\
   &&& &&& &&   \\ 
\hline 
  &&& &&& &&   \\
Constant& 	{\bf ***5.778}& 	{\bf ***1.765}	&{\bf ***5.561}	&{\bf **1.355}& 	{\bf ***8.569}& 
-1.457&{\bf ***5.899}	&{\bf *1.211}\\
  &&& &&& &&   \\
Log (Assets)& 	{\bf ***.215}& {\bf *-.076}	  & {\bf ***.218}& 	-.026	&{\bf *.083}& 
-.038& {\bf ***.211}& 	.030\\
  &&& &&& &&   \\
Profitability	&{\bf ***.034}& 	.000 & {\bf ***.034}& 	.010& {\bf **	.039}& 	.003& 
{\bf ***.035}& 	-.004\\
  &&& &&& &&   \\
Stock Pr Gr	& -.130	&{\bf **.247}& 	-.108& {\bf **.229}& 	-.032& 
.083&		-.069&		.166\\
  &&& &&& &&   \\
Multi Positions&	{\bf **.286}&	{\bf *-.297}&	{\bf ***.394}&		-.267&		-.053&	
{\bf **.506}&	{\bf ***.366}&		-.298\\
  &&& &&& &&   \\
Option Program&	{\bf ***.254}&		{\bf *-.201}	&{\bf **.187}	&	-.150&		.048&	.166& {\bf **.186}& 	-.165\\
  &&& &&& &&   \\
Executive Age& {\bf **.017}& 	-.000& {\bf ***.022}& 	-.002& 	.006& 	.011& 
{\bf ***.018}& 	-.002\\
  &&& &&& &&   \\
Exec Sh Value	&   &	{\bf ***.083}	& &{\bf ***.078}	& &{\bf ***.131}& &
{\bf ***.066}\\
  &&& &&& &&   \\
SEC Accounting&  		.201	&& 	.263	& &{\bf *.467}	&&	.329&\\
  &&& &&& &&   \\
\hline 
\end{tabular}

\noindent
{\it     Definitions:}\\
     Alternative 1:  corporate presidents who either (i) are among
the top 10 shareholders of the firm, (ii) work at their own family
firm (as defined in the Appendix), (iii) have appeared on the TSR
high-income taxpayer list more than five times, or (iv) are under
age 40.\\
     Alternative 2:  corporate presidents who meet requirements (i),
(ii), or (iv) above.\\
     Alternative 3:  corporate presidents who meet requirements (i)
or (iii) above.\\
     Alternative 4:  corporate presidents who are among the top 10
shareholders of the firm.




\end{scriptsize}
 \oddsidemargin 0in

\newpage

  \noindent
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\end{document}