Convergence or Emerging Diversity?: Understanding the Impact of Foreign Investors on Corporate Governance in Japan

After the banking crisis of 1997, the corporate ownership in Japan shifted from an insider-dominated to outsider-dominated structure. On the role of increasing foreign ownership and its consequences, there are two competing views. The first view, convergence view, is that foreign investors had high monitoring capability, and encourage improving governance arrangement of firms, resulted in higher performance. Conversely, the negative view, divergence view, insists that they had strong bias in their investment strategies, and are less committed to a firm. Even though the correlation between foreign ownership and corporate polices and high performance could be observed, it could be superficial. Higher stock return can be induced by their order demand, while the performance can be just that foreign investors preferred high quality firm. To answer which view is plausible, this paper analyzes the impact of drastic changes in the ownership structure to the corporate governance, corporate policies and the firm value, with a focus on the role of foreign investors.