Corporate Governance Systems and Firm Value: Empirical Evidence from Japan’s Natural Experiment

Robert N. Eberhart (Stanford University)

Abstract: This study uses panel data to explore economic efficiency of corporate governance systems by examining the effects of cross-sectional differences among Japanese firms selecting one of two legal systems. The paper presents evidence that the adoption by Japanese firms of a shareholder-oriented, more transparent, system of corporate governance creates greater corporate value in comparison to the traditional system of statutory auditors. The effect is not only significant, it is important in magnitude. This paper takes advantage of the unique opportunity afforded by Japan’s introduction of a dual system of corporate governance in 2003, when companies were offered a choice to adopt a new system of outside directors, which is a shareholder-oriented committee system. Data analysis shows a significant increase in firm valuation, as measured by Tobin’s q, for companies that adopted the committee system, even though comparative financial data show little difference. This finding is attributed to signal sending, as companies that adopted this system signal a choice toward transparency via monitoring by outsiders.