Ownership, Governance Arrangement and Corporate Policies: How Does Foreign Institutions Play Its Disciplinary Role in Japan?

Thursday, 2 July 2015: 10:15 AM-11:45 AM
CLM.3.07 (Clement House)
Hideaki Miyajima, Waseda University, Tokyo, Japan
Ryo Ogawa, Waseda University, Tokyo, Japan
After the banking crisis of 1997, the corporate ownership in Japan shifted from an insider- to outsider-dominated structure, mainly driven by increasing foreign ownership.  What is the outcome of this drastic change?  Does the increasing foreign ownership begin to play a significant monitoring role over Japanese listed firms instead of the former main bank?  Miyajima et al. (2015), consistent with Ferreira and Matos (2008) on cross national analysis, show that the increasing share held by foreign institutional investors associates with higher corporate performance measured by Tobin’s Q and ROA, even carefully controlling the reverse causality.
     What is remaining then is how increasing foreign ownership plays such a disciplinary role in spite of their peculiar investment behaviors known as the home country bias.  In general, the disciplinary role is based on the voice which takes following three forms; 1) the direct interventions supported by block holding, 2) the activities of independent directors, who are directly or indirectly dispatched from outside shareholders, and 3) takeover mechanism.
     However, none of all three mechanisms in Japan is fully working well.  Our hypothesis is that foreign institutional investors exert their influence on firms through their exit as a much realistic mechanism.  Once the foreign ownership increased whatever reasons they are, their exit associates with a substantial decline of the stock price.  According to Miyajima et al. (2015), the change of foreign ownership results in a significant stock price change during the period of 1990-2008.  One standard deviation of increasing (decreasing) shareholding (5%) associates with 10 % rise (decline) of excess return.  Top managements’ concerns over the stock price are illustrated by their active IR and information disclosure since 2000 (Miyajima [2007]).  Our recent survey (Miyajima et al. [2013]) also shows that 90% of top management of firms concerns shareholders values recently, which is substantially different from the survey results in the early 1990s.  Therefore, it is very plausible that as foreign ownership increased, the top managers in Japanese firms have had strong incentives to alter their governance institutions by introducing the shareholder-friendly arrangement such as independent outside directors, active information disclosure, and earlier mailing their proxy statement to shareholders.  It is also likely that they prefer to take shareholder-friendly corporate policies such as taking higher risk projects, choosing higher leverage, and raising their dividend payout.
     In this paper, based on those hypothesis, we examine the relationship among ownership structure, corporate governance arrangement and corporate policies.