Does Ownership Really Matter? : The Role of Foreign Investors in Corporate Governance in Japan

After the banking crisis of 1997, corporate ownership in Japan shifted from an insider-dominated to an outsider-dominated structure. This paper analyzes the impact of dramatic changes in the ownership structure on corporate governance and firm value, focusing on the role of foreign institutional investors. There are two competing views on the role of increased foreign ownership. The positive view is that foreign investors have had high monitoring capability, and encourage improvements in the governance arrangement of firms, resulting in higher performance. Conversely, the negative view is that they have had strong bias in their investment strategies, and are less committed to a particular firm. Even though a correlation between foreign ownership and high performance has been observed, it may be a superficial one. Higher stock returns can be induced by the demand for a stock, while performance can simply reflect a foreign investor's preference for a high quality firm. To determine which view is more compelling, we constructed a unique long-term data set, and examined determinants of foreign ownership and its impact on stock returns as well as performance. We found that the investment behavior of foreign investors has been characterized by a particular bias, and takes into account governance arrangements. Second, their investment substantially affected the stock return of firms. Third, even after controlling for reverse causality, however, their growing presence positively affected firm performance, suggesting that foreign institutional investors played a disciplinary role once after their shareholding increased.