Is Japan Really a “Buy”? The Corporate Governance, Cash Holdings and Economic Performance of Japanese Companies

Abstract

We investigate whether Japan's much‐touted governance reforms improve its firms’ management of cash, economic performance and valuation. Consistent with an improvement in governance since 2000, Japanese firms hold less cash and increase payouts to shareholders. Improvements in performance are associated with reductions in (excess) cash, reductions in the influence of the banks that traditionally sit at the center of horizontal keiretsu, and increases in the holdings of management and foreign investors. The market valuation of Japanese firms’ cash holdings was lower than for US firms during the 1990s but increased to levels closer to those of US firms in the 2000s. Collectively, the evidence suggests that performance improves in those Japanese companies that reform their governance practices. These findings have implications for other Asian economies, such as China, India and Korea, where there are ongoing discussions of whether improved governance can increase firm performance and valuation.

The Determinants of Cash Holdings around Different Regions of the World

“…Gao, Harford, and Li (2013) analyze that in USA, public firms hold cash or cash equivalents as 18.8% of their total assets. Kato, Li and Skinner (2017) find that cash constitutes 10% of the total assets for Japanese companies. Guizani (2017) identifies that cash holdings are 14 % of total assets in Saudi companies.…”

Unnatural Selection of Outside Directors: Consequences of Japanese Corporate Governance Reforms

“…Corporate governance of Japanese firms has been characterized by a "main bank" system and an internal relationship-based structure (Aoki et al, 1994;Aoki, 2001). Under this system, creditors, especially lender banks, play a significant role in governance; employees (including managers) are considered important stakeholders; and companies put much less weight on shareholder rights (Kato et al, 2017). Specifically, the board of directors tends to be dominated by internally promoted members and the monitoring and/or supervision of operations are the responsibility of the Kansayaku-kai (the board of company auditors), which is separate from the board of directors.…”

“…Buchanan (2007) conducts interviews with Japanese managers and finds that company auditors' independence and monitoring ability are substantially limited owing to the strong internal relationships. Moreover, Kato et al (2017) As a result of this poor economic performance, the Japanese government published the "Japan Revitalization Strategy" in June 2013 and advocated enhancing corporate governance to improve investor confidence and facilitate aggressive business management, as well as increase the earnings capacity of firms. The strategy was followed by rapid and significant responses from the Ministers and financial regulators, leading to consecutive publications of "Japan's Stewardship Code" (Financial Service Agency, February 2014), "Ito Review" (Ministry of Economy, Trade and Industry, August 2014), and "Japan's Corporate Governance Code" (Tokyo Stock Exchange, June 2015).…”

Effect of Board Diversity on Financial Performance of Firms in Malaysia: A Moderating Role of Corporate Sustainability Practices

“…The global economic and financial crises have diminished the public trust in the institutions, principles and the very concept of market economy (Lins, Servaes, & Tamayo, 2017). Financial scandals and crises often originate from lack of effective corporate governance practices in the corporations (Berger, Imbierowicz, & Rauch, 2016;Kato, Li, & Skinner, 2017). It has been considered the most critical issue in business world after global financial crisis as it has shaken many economies and led them to recession.…”

“…During the wave of Asian financial crises in 1997 and in 2008 the activities of the corporate sectors affect entire economy. Financial crises are mainly attributed to the poor corporate governance practices (Kato et al, 2017;Laallam, Alom, & Mohamad, 2017). Dias et al (2016) reveal that during the crises, FP of firms usually deteriorates.…”