Discussion Paper by Miyajima & Ogawa: ”Convergence or Emerging Diversity? Understanding the impact of foreign investors on corporate governance in Japan”

”Abstract: The increasing share of foreign institutional investors has been a global phenomenon for the past few decades. Corporate ownership in Japan shifted from an insider‐dominated to outsider‐dominated structure after the banking crisis of 1997. On the role of increasing foreign ownership and its consequences, there are two competing views. The first view, or convergence view, is that foreign investors have high monitoring capability, and encourage improvements in the governance arrangements of firms, resulting in higher performance. Conversely, the skeptical view insists that they have a strong bias in their investment strategies and are less committed to a firm. Even though a correlation between foreign ownership and corporate polices and high performance could be observed, it could be superficial. Higher stock returns can be induced by their order demand, while performance can simply reflect foreign investors’ preference for high quality firms. To answer which view is more persuasive, this paper analyzes the impact of dramatic changes in the ownership structure on corporate governance, corporate policies, and firm value, with a focus on the role of foreign investors, particularly in Japan…………..

In Japan, however, the main concern of top management in regard to the exit of foreign investors is neither the threat of a hostile takeover nor the decreasing value of their stock holdings (stock options). Both of these mechanisms do not seem to have a direct impact on management behavior. Rather, first, a stock price decline may have a substantial effect partly because it could increase capital costs and therefore make it harder to raise capital. Second, more importantly the stock price decline could negatively affect the reputation of top management, which in turn could convince corporate insiders to withhold support….”

Read full paper here.

Source: The Research Institute of Economy, Trade and Industry (REITI)

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