Corporate governance systems and firm value: empirical evidence from Japan's natural experiment
| Published date | 20 July 2012 |
| Pages | 176-196 |
| DOI | https://doi.org/10.1108/15587891211254399 |
| Date | 20 July 2012 |
| Author | Robert Eberhart |
| Subject Matter | Strategy |
Corporate governance systems and firm
value: empirical evidence from Japan’s
natural experiment
Robert Eberhart
Abstract
Purpose – This paper aims to present evidence that the adoption by Japanese firms of a
shareholder-oriented, more transparent, system of corporate governance creates greater corporate
value in comparison to the traditional system of statutory auditors.
Design/methodology/approach – This study uses panel data of Tokyo Stock Exchange listed
companies to explore the potential convergence of corporate governance systems by examining the
value differences between Japanese firms selecting one of two legal systems. A random-effects panel
regression is used to analyze the data. The dependent variable of the study is Tobin’s q.
Findings – This paper finds a significant increase in firm valuation, as measured by Tobin’s q, for
companies that adopted the alternative of the Anglo-American type committee system, even though
comparative financial data show little difference in performance after adoption. This finding is attributed
to signal sending, as companies that adopted this system signal a choice toward transparency via
monitoring by outsiders, suggesting a reduction of asymmetric agency costs. The paper finds that the
committee corporate governance system produces higher corporate value than the traditional auditor
governance. The study also finds evidence that it is the signal provided by adoption of the credible
system, not the financial performance variables, that accounts for this difference.
Social implications – The data support the central idea that corporate governance laws have
consequences and encourages additional study of the effects of corporate signaling and the
consequences of increased shareholder orientation of agents.
Originality/value – This paper takes advantage of the unique opportunity afforded by Japan’s
introduction of a dual system of corporate governance in 2003, when companies were offered a choice
to adopt a new system of outside directors, which is a shareholder-oriented committee system. It
establishes that firm value can be created by a signal that corporate governance provides.
Keywords Corporate governance, Japan, Committee system, Boards of Directors, Shareholders,
Auditors
Paper type Research paper
Introduction
Recent economic turmoil has refocused examination of corporate governance systems.
Seen by some observers as the standard of corporate governance, the US system of
shareholder-oriented governance by board committees and independent directors has
come under re-examination. Before September 2008, many observers describe a de facto
convergence on the Anglo-American governance model reasoning that the purported
economic efficiency of that model will motivate governments to adopt legal structures to
emulate its norms (Hansmann and Kraakman, 2001). In Japan, this motivated firms such as
Sony and Hitachi to create Anglo-American governance institutions within the laws that then
existed there, and foreign shareholders exerted influence to revise corporate governance
practices (Deakin and Whittaker, 2009; Ahmadjian, 2003; Nottage and Wolff, 2005).
However, the question of whether the adoption of a different corporate governance system
results in demonstrably differential corporate value to thus drive convergence remains
PAGE 176
j
JOURNAL OF ASIA BUSINESS STUDIES
j
VOL. 6 NO. 2 2012, pp. 176-196, QEmerald Group Publishing Limited, ISSN 1558-7894 DOI 10.1108/15587891211254399
Robert Eberhart is
Researcher at the
Department of
Management Science and
Engineering, Stanford
University, Stanford,
California, USA.
The author gratefully
acknowledges the invaluable
help, constructive editorial
suggestions, and advice from
Martin Kenney, Masahiko Aoki,
Charles O’Reilly,Renee Rottner,
Ulrike Schaede, George Foster,
Christina Ahmadjian, Rafiq
Dossani, Richard Dasher,
Henry Rowen, William Miller,
Avner Greif, Mamiko
Yamashita, TakuroYamashita,
and Shinji Ide. The author also
thanks the International Society
for New Institutional Economics
in which an earlier version of the
paper was presented at its
2011 conference at Stanford
University. Errors in this paper
are fully and completely the
author’s.
incompletely addressed. Now, with US corporate governance practices being called into
question for failures of incentives and monitoring inefficacies, examination of the purported
benefits from an Anglo-American corporate governance system seems beneficial.
Despite the abundant academic research on comparative corporate governance systems
where much attention is paid to the issue of convergence the issue remains unresolved. One
important stream of literature argues that increasing assets values on financial markets
during the 1990s drove firms to seek listings on US exchanges and consequently caused
those firms to adopt US corporate practice (Nakamura, 2010). In this stream, the mechanism
of convergence on an Anglo-American system is economic gain (Hansmann and Kraakman,
2001; Jacoby, 2002). Recent studies found a link between a firms value using the
Institutional Shareholder Services database to score firms with seven dimensions of
corporate governance centered on the Anglo-US model and found valuation positively
related to score (Brown and Caylor,2006). Using similar methods, a study of Japanese firm
performance under varying corporate governance variations found that Japanese firms with
higher scores reflecting conformance to the Anglo-US model had better performance as
measured by return on assets and Tobin’s q. That paper found that increasing economic
pressure from Japanese capital markets encouraged corporate managers to attempt
corporate governance reform and found reform more likely the higher the percentage of
foreign investors and a lower percentage of long-term, stable shareholders (Miyajima,
2006). Some scholars in this stream argue that convergence towards the Anglo-American
shareholder-oriented model has already occurred to a ‘‘shareholder-oriented model of
corporate governance, involving extensive use of market-based control mechanisms to
guide corporate activity and corporate law’’ (Nottage and Wolff, 2005). There is some
evidence that a convergence of opinion on corporate governance principles, such as the
necessity of transparent information systems (Khanna et al., 2006), or the US market for
corporate control (Jensen and Ruback, 1983).
A related but contrasting stream of research argues that the path-dependent nature of
corporate governance structures via the presence of sunk costs, the logic of corporate
governance, complementarity, or institutional inertia imply that any convergence will be
gradual if not outright resistance (Bebchuk and Roe, 1999; Schmidt and Spindler, 2002;
Gordon et al., 2004). Moreover, comparative institutional analytic literature suggests that
path-dependent systems of corporate governance derive from the underlying local
organizational and industrial architecture (Aoki and Jackson, 2008) or historical-economic
context (Greif, 2006; Nottage and Wolff, 2005; Nottage et al., 2008). A study using
event-study methods to compare share prices of Japanese firms that adopted new
governance structures found little discernable difference in the value of the firms as tested
by stock price trajectories (Gilson and Milhaupt, 2004).
Resolution of the debate between convergence and path-dependence is incompletely
resolved because it is difficult to adjudicate with only theoretical work and empirical
examinations of single systems in an economic domain are inevitably confounded by local
conditions as they change over time. Cross-national comparisons are confounded by
fundamental economic dynamics and rarely do when diverse corporate governance
regimes are extant at the same time in a national system, they are focused on differing legal
purposes, say partnership versus corporation, and thus the legal functional differences
confound efficiency comparisons. Indeed, recent works proposes that even if governance
practices should follow path-dependent trajectories and retain formal structures, there may
be a convergence in functionality, given similar economic forces (Gilson, 2001). A
reasonable comparison for analysis requires that systems of corporate governance co-exist
in an economic ecosystem so that comparative efficiencies and perhaps convergence itself
can be observed. Accordingly, an empirical study sufficient to establish convergence
beyond the analytic understanding of system changes remains elusive.
Japan provides an opportunity to study this empirical conundrum in a law enacted in 2002
allowing two corporate governance systems to operate concurrently in the same corporate
domain, Japanese stock issuing public corporations. The Japan Commercial Code revision
of 2002 introduced a new committee system similar to Anglo-American systems, designed
VOL.6NO.22012
j
JOURNAL OF ASIA BUSINESS STUDIES
j
PAGE 177
To continue reading
Request your trial