The impact of foreign investors on the risk-taking of Japanese firms

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 assumption as all standard measures of performance volatility appear 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 have on a firm’s decisions and, by consequence, on its performance.

► Foreign ownership affects the risk-taking behavior of Japanese firms. ► I use panel regressions with fixed firm effects. ► I control for endogeneity using ADR listing and MSCI membership as instruments. ► The effect of foreign investors is comparable to the effect of firm size and leverage. ► The results underscore the governance role played by this category of investor.