FOREIGN OWNERSHIP AND FIRM VALUE: EVIDENCE FROM JAPAN

Stephen P. Ferris · Kwangwoo Park

37 citations0/0 files storedAdvances in financial economics

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Corporate Finance and Governance Financial Markets and Investment Strategies International Business and FDI

Abstract

We find a significant curvilinear relation between Japanese firm value and the percentage of equity held by foreign investors. Firm value rises until foreign ownership reaches approximately 40%, and then it begins to decline. It appears that large foreign institutional investors invest in well-performing firms and serve as effective monitors. Our results remain robust even after controlling for other corporate governance variables, such as equity ownership by main banks and board membership by foreign investors. It seems that most of the increase in firm value and the performance improvement are due to rising levels of equity ownership in non-keiretsu (independent) firms by foreign investors. We also show that an increase in foreign ownership is correlated with a rise in R&D expenditures, suggesting that foreign institutional investors contribute to the long-term viability and competitiveness of Japanese firms.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1988Management ownership and market valuation 1990Additional evidence on equity ownership and corporate value 1992Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt 1983The Structure of Ownership and the Theory of the Firm 1991The Effects of Board Composition and Direct Incentives on Firm Performance 1997Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan 1988Proxy contests and the efficiency of shareholder oversight

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