Governance through Shame and Aspiration: Index Creation and Corporate Behavior
58 Pages Posted: 31 Jul 2017 Last revised: 21 Nov 2018
Date Written: November 1, 2018
After decades of de-prioritizing shareholders' economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country's “best-run" companies by annually selecting the 400 most profitable of its large and liquid firms. We find that managers competed for inclusion in the index by significantly increasing ROE, and they did so at least in part due to their reputational or status concerns. The ROE increase was predominantly driven by improvements in margins, which were in turn partially driven by cutting R&D intensity. Our findings suggest that indexes can affect managerial behavior through reputational or status incentives.
Keywords: JPX-Nikkei 400 index; Corporate governance; Index inclusion; Reputation incentives; Status incentives; Return on equity; Capital efficiency; Social norms
JEL Classification: G18, G34, G38, G41, L51, M14, M52
Suggested Citation: Suggested Citation