The impact of corporate governance on corporate performance: Evidence from Japan

Topics: Governance, Corporate governance, Stock Pages: 16 (6823 words) Published: May 30, 2014
Available online at

Pacific-Basin Finance Journal 16 (2008) 236 – 251

The impact of corporate governance on corporate
performance: Evidence from Japan ☆
Rob Bauer a , Bart Frijns b,c,⁎, Rogér Otten a,d , Alireza Tourani-Rad c a

Limburg Institute of Financial Economics, Maastricht University, The Netherlands Nijmegen School of Management, Radboud University Nijmegen, The Netherlands c
Department of Finance, Auckland University of Technology, New Zealand d
AZL Fiducional, The Netherlands
Received 27 September 2005; accepted 22 May 2007
Available online 16 August 2007

Employing a unique data set provided by Governance Metrics International, which rates firms using six different corporate governance dimensions, we analyze whether Japanese firms with many governance provisions have a better corporate performance than firms with few governance provisions. Employing an overall index, we find that well-governed firms significantly outperform poorly governed firms by up to 15% a year. Using indices for various governance categories, we find that not all categories affect corporate performance. Governance provisions that deal with financial disclosure, shareholder rights, and remuneration do affect stock price performance. The impact of provisions that deal with board accountability, market for control, and corporate behavior is limited.

© 2007 Elsevier B.V. All rights reserved.
JEL classification: C21; C22; G34
Keywords: Corporate governance; Corporate performance

We wish to thank Governance Metrics International for sharing their governance data. We also would like to thank an anonymous referee, the editor (Ghon Rhee), and participants of the Inaugural Asia-Pacific Corporate Governance Conference, Hong Kong, 2005, the 3rd International Conference on Corporate Governance, Birmingham, U.K, 2005, the 13th Global Finance conference, Rio de Janeiro, Brazil, 2006, and the Asian FA/FMA, Auckland, New Zealand, 2006 for their useful comments and suggestions. Any remaining errors are ours. ⁎ Corresponding author. Nijmegen School of Management, Radboud University Nijmegen, P.O. Box 9108, 6500 HK Nijmegen, The Netherlands. Tel.: +31 24 3611599; fax: +31 24 3612379. E-mail address: (B. Frijns).

0927-538X/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.pacfin.2007.05.001

R. Bauer et al. / Pacific-Basin Finance Journal 16 (2008) 236–251


1. Introduction
In the past few years, numerous Japanese firms have voluntarily broken with one or more of Japan's well-established corporate traditions. A prime example is Sony, whose company board announced the appointment of Sir Howard Stringer on March 7, 2005. This type of event indicates a possible prelude to a more fundamental change in Japan's traditional system of corporate governance. For decades, the Japanese system has been distinctly different from its Western counterpart: That is, corporate governance was mainly self-conducted and characterized by large inter-corporate shareholdings and the deep involvement of a main bank. With the ongoing integration of financial markets and the rise in foreign ownership, Western-like governance features may become more and more important for Japanese firms. Indeed, some facets of the newly proposed code of corporate governance under consideration by the Japanese government are in line with those already practiced in many Western countries. In this article, we investigate whether Japanese firms with better Western-like governance features have a better stock price performance. In the past decade, empirical research has shown significant relationships between various corporate governance features and corporate performance. Until recently, however, the majority of researchers have focused on specific features of corporate governance, which makes it difficult to establish an overall relationship between corporate...

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