A comparison of the financial characteristics of U.S. and Japanese chemical firms

Multinational Business Review, Fall 1997 by Meric, Ilhan, Ross, Linda W, Weidman, Stephanie M, Meric, Gulser

Our growing trade deficit with Japan and the deteriorating competitiveness of many of our industries vis-a-vis their Japanese counterparts have provided motivation for a number of comparative studies of U.S. and Japanese firms in recent years. This study compares the financial characteristics of U.S. and Japanese chemical firms by using the MANOVA (multivariate analysis of variance) method. Our findings indicate that the overall financial characteristics of U.S. and Japanese chemical firms are significantly different. U.S. chemical firms are more profitable. However, the keiretsu system enables Japanese chemical firms to use more financial leverage to boost their return on equity. The keiretsu system also enables Japanese chemical firms to use the just-in-time inventory method more extensively to minimize their inventories.

INTRODUCTION

The U.S. global trade balance has shown a deficit for twenty-three of the last twenty-five years. In 1994, the U.S. global trade deficit was $151 billion. About 43.5 percent of this deficit was with Japan. Our trade deficit with Japan has increased sharply during the last fourteen years from 10 billion in 1980 to $65.7 billion in 1994. There is a considerable increase in the number of comparative studies of U.S. and Japanese firms in recent years (see: Frankel, 1991; Aggarwal, 1994). Most of these studies have compared the cost of capital and financial leverage of firms in the two countries (see, e.g., Kester, 1986; Friend and Tokutsu, 1987; Kester and Luehrman, 1992). In a recent study, Meric and Meric (1994) compare the overall financial characteristics of 562 U.S. and Japanese manufacturing firms from 28 different industries. However, the MericMeric study does not compare the financial characteristics of U.S. and Japanese firms in individual industries. In this study, we compare the financial characteristics of U.S. and Japanese manufacturing firms in the chemicals industry, one of very few industries in which U.S. has a trade surplus with Japan.

DATA AND METHODOLOGY

The data of the study have been drawn from the DISCLOSURE Worldscope/Global data file. The sample includes 87 chemical firms from each country with no missing financial data for the 1988-1992 time period.

Comparing the financial characteristics of different groups of firms with financial ratios has been a widely used research methodology in the finance literature (see, e.g., Altman, 1968; Balkaoui, 1978; Meric, and Meric, 1992). In this study, we compare the financial characteristics of U.S. and Japanese chemical firms by using ten well-known financial ratios. Financial ratios computed with data for a single year may be influenced by some temporary, unusual circumstances occurring in that year and may not represent the long-term, true financial characteristics of firms. Therefore, financial ratios used in our study are 5-year averages for the 1988-1992 time period computed with data from the year-end financial statements of the firms. The ten financial ratios used in the comparisons are presented in Table 1. Multiple discriminant analysis (MDA) and multivariate analysis of variance (MANOVA) are the two statistical techniques most widely used in previous studies to compare the financial characteristics of different groups of firms with financial ratios. The MANOVA technique is used in this study to compare the financial characteristics of U.S. and Japanese chemical firms.

There is a great deal of commonality between the United States and Japan in terms of basic accounting concepts and conventions (see: Coopers and Lybrand, 1993). A recent study by Brown, Soybel, and Stickney (1993) suggests that "alternative accounting principles do not seriously distort the comparability of U.S. and Japanese financial statement data" ibid., p.77].

In Japan, many firms operate in corporate groups called keiretsus. Each group usually includes firms from eight or more different industries. Their purpose is to provide operating links between the firms. Normally, a keiretsu includes a financial institution that provides loans to group members at favorable interest rates. In our comparisons, we will point out if some of our findings are likely to be affected by the keiretsu practice in Japan.

MANOVA RESULTS

The univariate and multivariate test statistics are presented in Table 2. The multivariate F statistic is significant at the 1 percent level, which indicates that the overall financial characteristics of U.S. and Japanese chemical firms are significantly different.

Profitability

The univariate test statistics show that all profitability ratios (ProfMar, ROA, ROE, and COVER) are significantly higher in U.S. chemical firms than in Japanese chemical firms at the 1 percent level.

The U.S. mean ProfMar ratio is significantly higher than the Japanese mean ProfMar ratio (10.11% vs. 6.21%). In a world market with competitive prices for chemical products, this implies that the cost of manufacturing chemical products is significantly lower in the U.S. than in Japan. The mean TaTum and ROA ratios are also significantly higher in U.S. chemical firms than in Japanese chemical firms (1.21 vs. 0.84 and 8.49% vs. 3.56%, respectively). U.S. chemical firms are able to earn significantly higher profits on their total assets compared with Japanese chemical firms.