Institutional ownership and corporate risk-taking in Japanese listed firms

ABSTRACT

Agency theory predicts that institutional ownership plays an important role in monitoring corporate risk-taking. This study examines this ownership-risk taking linkage in Japan over the period 2007 and 2019. We proxy risk through measures of idiosyncratic risk, total risk, and market beta. We show that (relational) foreign institutional shareholdings (do not) induce corporate risk-taking, thereby mitigating (preserving) the managerial ‘quiet life’ in Japanese corporations. Using 2SLS analysis, the roles of institutional shareholders are robust to endogeneity concerns. Finally, we also confirm robustness using alternative accounting-based risk proxies such as the standard deviation of Tobin’s Q and ROA. Our study implies that the monitoring of institutional shareholders is important in Japanese corporations whose top executives might be prone to seek a ‘quiet life’.

KEYWORDS:

• Institutional shareholders
• corporate Governance
• corporate risk-taking
• japan

JEL CLASSIFICATION:

• G30
• G32
• G34

Acknowledgments

The earlier version of this article was presented at Finance Workshop in Hitotsubashi University and 31st Asian Finance Association Annual Meeting. We thank Kotaro Inoue, Tahatoshi Ito, Tanapond Swanpitak, Toshio Tamura, Yukihiro Yasuda and all the participants at the workshop and the meeting. This research was financially supported by the Murata Science Foundation and the Japan Ministry of Education, Culture, Sports, Science and Technology (Grants-in-Aid for Young Scientists A; 17H04784), and Grant-in-aid for research in Nagoya City University (No. 2021201). On behalf of all authors, the corresponding author states that there is no conflict of interest.

A data availability statement

The data that support the findings of this study are commercially available from Astra Manager (QUICK), Nikkei NEEDS CGES (Nikkei) and NPM database (Financial Data Solutions). Restrictions apply to the availability of these data, which were used under license for this study. Data are available at (https://corporate.quick.co.jp/en/), (http://www.nikkei.co.jp/needs/cges/) and (https://fdsol.co.jp/) with the permission of QUICK, Nikkei, and Financial Data Solutions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In the 1990s, foreign ownership of Japanese firms was less than 5% (Desender et al. 2016)

² In 2015, the Japanese government introduced a Stewardship Code outlining the responsibilities of institutional investors to enhance the medium- to long-term investment returns for their clients and beneficiaries by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement, or purposeful dialogue, based on in-depth knowledge of the companies and their business environment.

³ In the Asia-Pacific region, several recent empirical studies show the effect of institutional shareholders. For example, in emerging countries such as Pakistan, the role of institutional shareholders is effectively performed (Nazir, Nazir, and Javaid 2018).

⁴ According to Japanese equity method’s overview, shareholders who own more than 15% of outstanding shares are defined as relational investors. Thus, we classify relational shareholders as domestic investors who own more than 15% of outstanding shares, as in Appendix A.

⁵ If corporate risk-taking does not enhance future profitability, the rationale underlying the managerial quiet life hypothesis might be justified. Thus, we additionally check this point.

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science [Grants-in-Aid for Young Scientists (A, 17H04784)]; Murata Science Foundation.