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Corporate governance systems and firm value: empirical evidence from Japan's natural experiment

Corporate governance systems and firm value: empirical evidence from Japan's natural experiment Purpose – This paper aims to present evidence that the adoption by Japanese firms of a shareholder‐oriented, more transparent, system of corporate governance creates greater corporate value in comparison to the traditional system of statutory auditors. Design/methodology/approach – This study uses panel data of Tokyo Stock Exchange listed companies to explore the potential convergence of corporate governance systems by examining the value differences between Japanese firms selecting one of two legal systems. A random‐effects panel regression is used to analyze the data. The dependent variable of the study is Tobin's q. Findings – This paper finds a significant increase in firm valuation, as measured by Tobin's q, for companies that adopted the alternative of the Anglo‐American type committee system, even though comparative financial data show little difference in performance after adoption. This finding is attributed to signal sending, as companies that adopted this system signal a choice toward transparency via monitoring by outsiders, suggesting a reduction of asymmetric agency costs. The paper finds that the committee corporate governance system produces higher corporate value than the traditional auditor governance. The study also finds evidence that it is the signal provided by adoption of the credible system, not the financial performance variables, that accounts for this difference. Social implications – The data support the central idea that corporate governance laws have consequences and encourages additional study of the effects of corporate signaling and the consequences of increased shareholder orientation of agents. Originality/value – This paper takes advantage of the unique opportunity afforded by Japan's introduction of a dual system of corporate governance in 2003, when companies were offered a choice to adopt a new system of outside directors, which is a shareholder‐oriented committee system. It establishes that firm value can be created by a signal that corporate governance provides. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Asia Business Studies Emerald Publishing

Corporate governance systems and firm value: empirical evidence from Japan's natural experiment

Journal of Asia Business Studies , Volume 6 (2): 21 – Jul 20, 2012

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
1558-7894
DOI
10.1108/15587891211254399
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper aims to present evidence that the adoption by Japanese firms of a shareholder‐oriented, more transparent, system of corporate governance creates greater corporate value in comparison to the traditional system of statutory auditors. Design/methodology/approach – This study uses panel data of Tokyo Stock Exchange listed companies to explore the potential convergence of corporate governance systems by examining the value differences between Japanese firms selecting one of two legal systems. A random‐effects panel regression is used to analyze the data. The dependent variable of the study is Tobin's q. Findings – This paper finds a significant increase in firm valuation, as measured by Tobin's q, for companies that adopted the alternative of the Anglo‐American type committee system, even though comparative financial data show little difference in performance after adoption. This finding is attributed to signal sending, as companies that adopted this system signal a choice toward transparency via monitoring by outsiders, suggesting a reduction of asymmetric agency costs. The paper finds that the committee corporate governance system produces higher corporate value than the traditional auditor governance. The study also finds evidence that it is the signal provided by adoption of the credible system, not the financial performance variables, that accounts for this difference. Social implications – The data support the central idea that corporate governance laws have consequences and encourages additional study of the effects of corporate signaling and the consequences of increased shareholder orientation of agents. Originality/value – This paper takes advantage of the unique opportunity afforded by Japan's introduction of a dual system of corporate governance in 2003, when companies were offered a choice to adopt a new system of outside directors, which is a shareholder‐oriented committee system. It establishes that firm value can be created by a signal that corporate governance provides.

Journal

Journal of Asia Business StudiesEmerald Publishing

Published: Jul 20, 2012

Keywords: Corporate governance; Japan; Committee system; Boards of Directors; Shareholders; Auditors

References