The Impact of Foreign Investors on the Risk-Taking of Japanese Firms

Abstract

Consistent with a bank-centered governance system, Japanese firms exhibit an exceptionally low level of performance variability. The increased involvement of foreign investors motivated by shareholder value is thus likely to have triggered a major shift in their risk-taking behavior. My results confirm this hypothesis as the volatility of stock returns, market-to-book value, and profitability is found to have significantly increased with the level of foreign ownership. Controlling for endogeneity provides higher point estimates supporting anecdotal evidence that foreign investors have targeted firms taking unusually low risk. Overall, the evidence highlights the considerable impact that this category of investors can make on a firm’s decisions and, by extension, on its performance.

Keywords: foreign investors, monitoring, risk taking,volatility, heteroskedasticity test

JEL Classification: G30, G32, G34