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Abstract:
We examine the dividend policy of Japanese firms and find that dividend payout is negatively related to ownership concentration. This result contradicts the argument that dividends are substitute for shareholder monitoring, but supports the assumption that controlling shareholders extract private benefits at the expense of minority shareholders. Consistent with their lower payout, firms with dominant shareholders are less likely to increase dividends when profitability increases and more likely to omit dividends when investment opportunities improve. On the other hand, they are more likely to increase dividend when debt is high and less likely to omit dividends when debt increases, which is tantamount to a wealth transfer from debtholders. Overall, ownership concentration appears to play a critical role in corporate decisions, mainly due to the way it intensifies the agency conflicts between majority and minority shareholders.

dividend policy, agency conflicts, ownership concentration

Abstract:
In this study, we construct a corporate governance index based on several attributes known for their association with firm profitability and market value. The index is used for evaluating the performance of governance-sorted portfolios. We find that the portfolio of well-governed firms significantly under performs the portfolio of poorly governed firms. This result is essentially explained by the higher valuation of well-governed firms. After adjusting for market, size and value (book-to-market) risk factors, excess returns become insignificant across all portfolios. This appears to suggest that governance attributes are accurately reflected in stock prices. However, the period of investigation may have influenced the outcome. More research is needed before concluding to the irrelevance of corporate governance ratings for portfolio selection.

corporate governance, portfolio selection, stock returns, risk adjustment, Japan

Abstract:
We address two mean-variance asset allocation and hedging problems in continuous-time incomplete markets. The resolution emphasizes the geometric properties of mean-variance portfolios and underlines the role of two specific portfolios: The minimum norm and the minimum variance portfolios. We extend the portfolio strategies of Bajeux-Besnainou and Portait (1998) to the incomplete market setting and provide a set of fictitious assets that can complement the market without being traded. Moreover, the fictitious assets can be chosen independently of the investor's level of risk aversion. As importantly, we show that the fictitious completion is irrelevent in mean-variance portfolio problems. Taking the orthogonal projection of fictitious portfolio distributions on the space of attainable distributions provides the required attainable portfolio. This approach is applied successfully in the imperfect hedging problem of Duffie and Richardson (1991) where the least favorable completion cannot be explicited.

portfolio management, mean-variance, continuous trading, incomplete markets, fictitious completition, orthogonal projection

Abstract:
In this paper, I analyze the relationship between financial statements information and stock returns for firms listed on the Tokyo Stock Exchange. Firm-specific information is captured by way of score indicative of the firm's cash flow generating potential. The results show that score-based portfolio strategies can produce significant abnormal returns over a 10-year sample period. The excess return of high-score portfolios does not appear to result from a higher exposure to risk factors. The predictability of cross-section returns does not derive either from price momentum. I find that large stocks offer little profits to score-based portfolio strategies. Most of the abnormal returns are concentrated on small firms. The evidence is strongly supportive of a market underreaction to the financial information released by smaller lightly researched firms.

return predictability, market underreaction, stock returns, Japanese stocks

Abstract:
We construct a governance index based on several attributes known to be associated with good corporate governance. After checking that the index is positively associated with standard indicators of firm performance, we use it to evaluate the returns on governance-sorted portfolios. Our main finding is that poorly governed firms significantly outperform better-governed firms. However, this result derives from the greater risk exposure of poorly governed firms. After adjusting for size and book-to-market, excess returns become insignificant across all portfolios. We verify that neither the sample period nor the behavior of specific industries is responsible for this outcome. Consistent with market efficiency, stock prices appear to fairly reflect the higher (lower) risk associated with poor (good) corporate governance.

corporate governance, performance, stock returns, risk exposure, market efficiency

Abstract:
This paper examines the relationship between corporate governance and CEO compensation in China. In contrast to results derived from U.S. data, we find little evidence that Chinese CEOs take advantage of weaker board structures or less demanding shareholders to extract higher compensation packages. Instead, our results lend support to the view that the increasingly global managerial labor market and compensation standards have a greater impact on CEO pay level. Our study suggests that CEOs in developing economies like China, in our case, benefit more from their degree of exposure to these changes than from corporate governance imperfections.

CEO compensation, Corporate governance, Labor market, Globalization, China

Abstract:
We study the capital structure of Japanese firms using a partial adjustment model. To ensure that our approach is well specified and, in particular, that the over-identifying restrictions associated with system GMM are not rejected, our procedure is to partition firms in a number of homogenous groups. To do that, we combine leverage and profitability. The results show that Japanese firms have adjustment speeds comparable to US firms. More interestingly, access to collateral and cash flow generating potential have a greater influence on the capital structure of highly leveraged firms. In general, the results indicate that capital structure decisions depend on firms' creditworthiness and industry segment, but not so much on their affiliation to a business group.

Capital structure, Partial adjustment

Abstract:
We investigate the hypothesis that cash balances have a precautionary motive and serve to mitigate the volatility of operating earnings, which we use as a proxy for risk. Our results show that cash holdings are positively associated with firm level risk, but negatively related to industry risk. Consistent with previous findings, cash holdings are decreasing with the firm's size and debt ratio, and increasing with its profitability, growth prospects, and dividend payout ratio. The precautionary motive for holding cash is investigated by analyzing different cases under which cash shortfalls have different cost implications. The results show that keiretsu affiliated firms hold less cash and are less risk sensitive. There is also evidence that financial constraints reduce the incentives to mitigate earnings risk. Finally, we show that bank-controlled firms and highly leveraged firms increased their sensitivity to earnings volatility as the condition of Japanese banks deteriorated after 1998. Overall, our results strongly support the precautionary motive for holding cash and underline the importance of corporate risk mitigation.

Risk mitigation, cash, precautionary motive, financial constraints, banking crisis, Keiretsu affiliation

Abstract:
We use Keiretsu affiliation to analyze the dividend policy of Japanese firms. Assuming that Keiretsu membership provides monitoring benefits and reduces information asymmetries between managers and investors, we test (1) whether dividend changes are more sensitive to growth opportunities for Keiretsu affiliates and (2) whether dividend increases are more closely associated with future profitability increases for unaffiliated firms. Our results do not support the overinvestment hypothesis as both Keiretsu affiliates and non-affiliates increase dividend payments when growth indicators are strong. In contradiction with the signaling hypothesis, dividend increases do not point toward increases in net and operating profitability. However, dividend increases are followed by significant increases in net and operating profits as well as persistent sales growth. We rationalize this finding by assuming that signaling is directed towards the firm's creditors and industrial partners rather than its shareholders. This interpretation is consistent with Japan's distinctive industrial organization.

Dividend policy, signaling, overinvestment, Japan, Keiretsu, industrial organization

Abstract:
This article examines the determinants of life insurance consumption in OECD countries. Consistent with previous results, we find a significant positive income elasticity of life insurance demand. Demand also increases with the number of dependents and level of education, and decreases with life expectancy and social security expenditure. The country's level of financial development and its insurance market's degree of competition appear to stimulate life insurance sales, whereas high inflation and real interest rates tend to decrease consumption. Overall, life insurance demand is better explained when the product market and socioeconomic factors are jointly considered. In addition, the use of GMM estimates helps reconcile our findings with previous puzzling results based on inconsistent OLS estimates given heteroscedasticity problems in the data.

Abstract:
This article examines the role of keiretsu (i.e. business group) affiliation on the risk-taking of Japanese firms. We find that total risk, measured by firm-level stock price volatility, is not significantly affected by keiretsu membership. The reason is that affiliated firms are characterized by lower idiosyncratic risk along with higher systematic risk. However, idiosyncratic risk varies across business groups and appears to depend upon the firm's inclination towards its group. In contrast, the higher systematic risk of group affiliates is significant for each keiretsu and every degree of group inclination. Moreover, this result remains after adjusting risk for firm characteristics and industry effects. Hence, the consequence of group affiliation may more accurately be described by higher systematic risk. This result could reflect the weaker competitive position of keiretsu affiliates.

keiretsu, systematic risk, idiosyncratic risk, competitive advantage