Internal Corporate Governance Mechanisms and Foreign Investors: Evidence from Japanese IPOs

Abstract

Previous studies offer evidence that foreign investors invest less money in countries or firms with weak corporate governance structures (Aggarwal et al. 2005; Dahlquist et al. 2003; Kim et al. 2010; Leuz et al. 2009). Investigating Japanese companies that go public during the 1997-2002 period, we find that small boards and stock option adoptions increase the percentage ownership by non-Japanese investors after controlling for the effect of firm size, leverage and market-to-book ratio on foreign ownership. In contrast, there are no such tendencies for banks that can exert power on companies in informal ways. We also find that IPO firms with small boards perform better during the post-IPO period, and that foreigner shareholdings decrease board sizes. These results provide comprehensive evidence that foreign investors prefer firms with good governance in which the expropriation of minority shareholders is less evident. Given that previous studies focus on emerging markets, our study presents new evidence that internal corporate governance plays an important role even in developed countries in which minority shareholder rights are protected by law.