The Great Kanto Earthquake and the Tokyo Electric Light Company, Inc.: Moral Hazards Exacerbated by the Great Kanto Earthquake

The Tokyo Electric Light Company, Inc., the largest electric power company in pre-war Japan, took an active merger policy and started accounting manipulations to maintain high dividends in the 1920's. It, however, suffered extensive damage in 1923 when the Great Kanto Earthquake occurred and covered the damage by devising the appraisal profits of its fixed capital, which, though frequent in those days, constituted arbitrary accounting manipulations with no objective criteria. The Great Kanto Earthquake induced moral hazards to its management resulting in normalization of the accounting manipulations in the best interest of high dividends. Such accounting manipulations triggered the intervention of Mitsui Bank, Ltd. in its management, and partly contributed to the government control of electric power. As disasters are likely to show the inherent problems within companies, any temporary solution would instead result in more severe consequences.