Idiosyncratic Risk and Creative Destruction in Japan

52 Pages Posted: 3 Nov 2008

See all articles by Yasushi Hamao

Yasushi Hamao

Center on Japanese Economy and Business; University of Southern California - Marshall School of Business - Finance and Business Economics Department

Jianping Mei

New York University (NYU) - Department of Finance

Yexiao Xu

University of Texas at Dallas - School of Management

Date Written: November 2002

Abstract

The dramatic rise and fall of the Japanese equity market provides a unique opportunity to examine market-and firm-specific risks over different market conditions. The price behavior of Japanese equities in the 1990s is found to resemble that of U.S. equities during the Great Depression. Both show increasing market volatility and a prolonged large co-movement in equity prices. What is unique about the Japanese case is the surprising fall in firm-level volatility and turnover in Japanese stocks after its market crash in 1990. This large decrease in firm-level volatility may have impeded Japan s capital formation process as it has become more difficult over the past decade for both investors and managers to separate high quality from low quality firms. Using data on firm performance fundamentals and corporate bankruptcies, we show that the fall in firm-level volatility and turnover could be attributed to the sharp increase in earnings homogeneity among Japanese firms and the lack of corporate restructuring.

Suggested Citation

Hamao, Yasushi and Mei, Jianping and Xu, Yexiao, Idiosyncratic Risk and Creative Destruction in Japan (November 2002). NYU Working Paper No. FIN-02-053. Available at SSRN: https://ssrn.com/abstract=1294425

Yasushi Hamao (Contact Author)

Center on Japanese Economy and Business ( email )

3022 Broadway
New York, NY 10027
United States
310-717-0503 (Phone)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
310-717-0503 (Phone)

Jianping Mei

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

Yexiao Xu

University of Texas at Dallas - School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-6703 (Phone)

HOME PAGE: http://www.utdallas.edu/~yexiaoxu

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