Stock market listing and corporate policy: Evidence from reforms to Japanese corporate law

We study how the tradeoff between stock liquidity and stock market scrutiny affects corporate policy. We use panel data that cover public and private companies in Japan. The sample used in our main analysis consists of firms whose ownership is concentrated, in order to mitigate the agency conflicts that come from the separation of ownership and control. We exploit legal reforms as the source of exogenous variation in stock market listing. We find that listing reduces debt financing, especially dependence on long-term debt. In addition, we determine that listing improves profitability. These findings support the stock liquidity hypothesis. However, we also provide evidence that is not consistent with this hypothesis, by reporting that stock market listing does not reduce cash holdings. We discover that it increases capital expenditures and decreases R&D expenses. The two contrasting effects demonstrate the relevance of short-termism pressure from the stock market. We also observe that listing increases dividends and reduces tax aggressiveness, in line with the stock market scrutiny hypothesis. Our findings suggest that the liquidity-scrutiny tradeoff of stock market listing has heterogeneous effects on firm policy, depending on its nature.