Wartime Controls, Political Connections, and the Pricing of Zaibatsu Rents in Japan, 1930-1943

TL;DR

This study analyzes how wartime controls and political ties influenced Japanese stock prices and zaibatsu rents from 1930 to 1943, revealing institutional effects on market efficiency and asset pricing.

Contribution

It develops a novel asset-pricing model incorporating zaibatsu affiliation and wartime controls, and empirically tests it using detailed event-study analysis.

Findings

Zaibatsu affiliation affected expected payoffs and financing costs.

Stock prices responded to news while reflecting uneven access to resources.

The market exhibited institutionally contingent efficiency rather than collapse.

Abstract

This paper examines how wartime economic controls shaped stock-price formation in Japan from 1930 to 1943. We develop a four-portfolio asset-pricing model in which zaibatsu affiliation affects expected payoffs and the translation of valuations into economic scale through lower financing wedges. We then construct daily capitalization-weighted indices and four benchmark portfolios based on a two-by-two sort by zaibatsu affiliation and military orientation. Using a CAPM-AR(p)-SV event-study framework that allows for serial correlation and stochastic volatility, we show that the model rationalizes capitalization concentration, segmented abnormal returns, delayed cumulative adjustment, regime-risk insulation of zaibatsu portfolios, and zaibatsu-concentrated responses to embedded-rent or group-continuation shocks. The evidence is consistent not with a collapse of semi-strong efficiency, but with institutionally contingent efficiency: stock prices continued to respond to news while capitalizing uneven access to credit, materials, and procurement.