Asian Research Thesis Index

Abstract

The field of corporate governance has riveted interest of researchers and financial analysts over the last three decade in Japan. In age of globalization, voluntary corporate governance codes and legal reforms are increasingly proliferated in Far East Asia, continental Europe and in emerging economies; Japan’s corporate governance reforms were undertaken with a conviction that Japan’s discredited bank-based corporate government system, a legacy of the era following the Second World War, should be replaced by a US-style corporate governance system. US-Style Corporate Governance (CG) system was chosen as Japan’s model because of the robust economic performance of the US economy. Japan’s corporate reforms have introduced new laws which emphasize shareholders’ rights and shareholder value maximization, minority shareholders’ rights, competition in the market for corporate control, and transparency and information disclosure. With strong public support, the Japanese parliament promptly passed these new laws which reflected western liberal norms. The primary objective of this dissertation is to explain the underlying changes experienced by the corporate sector due to these reforms. The continuous reforms in the financial and corporate sector have induced a change in shareholders’ investment strategy and financing approach of listed companies in Japan. The unique features of Japanese corporate sector like the existence of main bank system, cross-holdings by firms, and the dual role of banks as a financier and shareholder, the presence of strong business networks in form of vertical and horizontal Keiretsu are under reforms process. To evaluate the behavior of investors and business practices of listed firms we select 1016 firms from 2439 non-financial firms of Tokyo Stock Exchange (TSE) to explain the causes of change in ownership structure and firm’s investment strategy in short and long run especially in reforms period. Our balance panel data estimates are consistent with the hypothesis, verifying that both restructuring process and firm’s value are profoundly associated with reforms. However, our results have significance because findings of this study will guide policy maker after completion of Abenomics policies in Japan. First, market-oriented shareholders still hold lesser proportions of equity than stable shareholders but their equity positions are increased significantly due to reforms. This indicates that collective impact of ownership transfer to market-oriented shareholders will improve firm’s efficiency and payoffs of minority shareholders. Secondly, after the introduction of independent directors and the new law of information disclosure have reduced the agency cost and inside ownership, like managers and directors have significantly positive effects on firm’s value and restructuring activities. Furthermore, the control transfer to ultimate owners has a significant impact on firm’s performance and value. Consequently, the corporate reforms followed by corporate restructuring have everlasting impact on firm’s ownership, performance and investment policy

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