Motivations and Effects of Engagement by Institutional Investors (Japanese)

This paper examines the motivations and the effects of the engagement activities by institutional investors in Japan by directly observing the private engagement activities of three large institutional investors. Taking advantage of the timing of the significant changes in the costs and benefits of engagement activities for institutional investors resulting from the revised Stewardship Code of 2017 which strongly promoted responsible monitoring by both asset managers and asset owners in Japan, we analyze a total of more than three thousand private engagements by large institutional investors in the period from 2017 to 2019. The main results are that each institutional investor engages with companies in which it has a high shareholding ratio and where the governance of the companies is poor. We show that the engagement activities increase the ratio of outside independent directors and the ratio of executive shareholdings, while they decrease the ratio of non-investment purpose shareholdings and abolish takeover defense measures of the target companies, indicating an improvement in governance of the target firms. In addition, we observed an increase in ROE and Tobin's Q at the target companies in the post-engagement period. These results indicate that engagement by institutional investors targets companies with poor governance and improves the governance and financial performance of the targeted companies.