Information, Institutions, and Extortion in Japan and the United States: Making Sense of Sokaiya Racketeers

Abstract

In Japan, a sokaiya is typically defined as a nominal shareholder who either attempts to extort money from a company by threatening to disrupt its annual shareholders meeting or works for a company to suppress opposition at the meeting. Since criminal penalties were clearly imposed on management payouts to sokaiya in 1982, executives of 33 Japanese corporations (almost all of which are household names) have been convicted of making payments to sokaiya. Many commentators argue that sociocultural factors such as the desire for orderly, harmonious meetings provide a compelling explanation for sokaiya activity in Japan. I argue instead that Japanese firms pay sokaiya because Japanese legal, regulatory, and corporate governance institutions discourage corporate disclosure. These institutions make fulfilling sokaiya extortion demands less costly than the alternative choices of (a) disclosure of negative information or (b) long shareholders meetings, which lead to negative market-adjusted stock returns. By contrast, in the United States, institutions lead to different uses for negative information, while in South Korea and Italy, whose institutions bear similarities to those of Japan, sokaiya-like actors are problematic. It follows that recent modest decreases in sokaiya activity are best attributed to changes in underlying Japanese institutions caused largely by increased competition.

JEL Classification: G34