Corporate Governance and Transparency in Japan

Abstract

We investigate the effect of corporate governance on corporate transparency in Japan, as indicated by the richness of the information environment for Japanese companies. We focus on firms’ disclosure frequency, properties of analysts’ forecasts and the speed of price discovery as indicators of corporate transparency. We find corporate governance in Japan is associated with increased disclosure and greater analyst following, but not more timely price discovery. In further analysis, we confirm board structure and composition are important factors influencing the firm’s level of disclosure and its analyst following, as in Western countries. However, analysts appear to be more optimistic about Japanese firms with better board structures when forecasting future performance. Compensation structures and the level of directors’ share ownership are other factors influencing the accuracy of analysts’ earnings forecasts. In contrast, outside ownership by foreign investors has little influence. Our results are consistent with the view that traditional Japanese corporate groupings and cross-shareholdings provide a strong motivation for disclosure through monitoring and enforcement. Our results show Western style corporate governance has a large role to play in disclosure by Japanese firms, but traditional Japanese structures are still important to corporate transparency.