Jun-Koo Kang

Why is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan

This paper uses data on foreign stock ownership in Japan from 1975 to 1991 to examine the determinants of the home bias in portfolio holdings. Existing models of international portfolio choice predicting that foreign investors hold national market portfolios or portfolios tilted towards high expected return stocks are inconsistent with the evidence provided in this paper. We document that foreign investors overweight shares of firms in manufacturing industries, large firms, firms with good accounting performance, firms with low unsystematic risk, and firms with low leverage. Controlling for size, there is evidence that small firms that export more have greater foreign ownership. Foreign investors do not perform significantly worse than if they held the Japanese market portfolio, however. After controlling for firm size, there is no evidence that foreign ownership is related to expected returns of shares. We show that a model with size-based informational asymmetries and deadweight costs can yield asset allocations consistent with our evidence.

Firm Performance, Corporate Governance, and Top Executive Turnover in Japan

We examine the role of corporate governance mechanisms during top executive turnover in Japanese corporations. Consistent with evidence from U.S. data, the likelihood of nonroutine turnover is significantly related to industry-adjusted return on assets, excess stock returns, and negative operating income, but is not related to industry performance. The sensitivity of nonroutine turnover to earnings performance is higher for firms with ties to a main bank than for firms without such ties. Outside succession in Japan is more likely for firms with large shareholders and a main bank relationship. We document performance improvements subsequent to nonroutine turnover and outside succession.

Corporate restructuring during performance declines in Japan

This paper documents the restructuring of 92 Japanese corporations that experienced a substantial decline in operating performance during 1986 to 1990. We find that these Japanese firms implement a number of downsizing measures such as asset sales, plant closures, and employee layoffs. Firms also respond by expanding and diversifying their operations, as well as by restructuring their internal operations. Compared to a sample of US firms that experience a similar decline in operating performance however, Japanese firms are less likely to downsize, and layoffs affect a smaller fraction of their workforce. The frequency of asset downsizing and layoffs in Japanese firms increases with the equity ownership by the firms main bank and other blockholders. Blockholders also increase the probability of management turnover, outside director removals and outside director additions, but decrease the likelihood of acquisitions. Finally, we document that downsizing measures in Japan are associated with significant improvements in operating performance. We conclude that Japanese banks and blockholders perform an important monitoring function by triggering firm responses during periods of poor performance.

Corporate Social Responsibility and Stakeholder Value Maximization: Evidence from Mergers

Using a large sample of mergers in the U.S., we examine whether corporate social responsibility (CSR) creates value for acquiring firms’ shareholders. We find that compared to low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers’ social performance is an important determinant of merger performance and the probability of its completion, and support the stakeholder value maximization view of stakeholder theory.

The international market for corporate control *1: Mergers and acquisitions of U.S. firms by Japanese firms

Abstract Japanese mergers and acquisitions in the U.S. create statistically significant wealth gains for both Japanese bidders and U.S. targets. Consistent with the literature on foreign direct investment and the market for corporate control, bidder-specific characteristics and exchange-rate movements are useful in explaining the cross-sectional variation in bidder returns: returns to Japanese bidders and to the portfolio of Japanese bidders and U.S. targets increase with the bidders leverage, the bidders ties to financial institutions through borrowings, and the depreciation of the dollar in relation to the Japanese yen.

Local Institutional Investors, Information Asymmetries, and Equity Returns

We examine the informational role of geographically proximate institutions in stock markets. We find that both the level of and change in local institutional ownership predict future stock returns, particularly for firms with high information asymmetry; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. The local advantage is especially evident for local investment advisors, high local ownership institutions, and high local turnover institutions. We also find that the stocks that local institutional investors hold (trade) earn higher excess returns around future earnings announcements than those that nonlocal institutional investors hold (trade). & 2010 Elsevier B.V. All rights reserved. All rights reserved. providing us with rm) data and Russ ted returns. We are

Foreign Ownership Restrictions and Equity Price Premiums: What Drives the Demand for Cross-Border Investments?

We study the impact of barriers to international capital flows with stock price data from 11 countries whose stock markets feature shares restricted to locals and otherwise identical shares available to foreigners. Large price premiums for unrestricted shares relative to matching restricted shares are typically observed. Although basic notions of international asset pricing offer a straightforward explanation for the price premiums, we find little evidence that the price premiums are explained by lower foreign required returns. Alternative concepts and theories centering on foreign investor demand and the supply of shares explain some of the time-series and cross-sectional variation of price premiums. More specifically, premiums for unrestricted shares are positively correlated with foreign investor demand in the form of international mutual fund flows, sentiment implicit in matching closed-end country fund premiums, market liquidity, and information reflected in press coverage, country credit rating, and firm size.

The Effect of Bank Relations on Investment Decisions: An Investigation of Japanese Takeover Bids

We study 154 domestic mergers in Japan during 1977 to 1993. In contrast to U.S. evidence, mergers are viewed favorably by investors of acquiring firms. We document a two-day acquirer abnormal return of 1.2 percent and a mean cumulative abnormal return of 5.4 percent for the duration of the takeover. Announcement returns display a strong positive association with the strength of acquirers relationships with banks. The benefits of bank relations appear to be greater for firms with poor investment opportunities and when the banking sector is healthy. We conclude that close ties with informed creditors, such as banks, facilitate investment policies that enhance shareholder wealth. Copyright The American Finance Association 2000.

The Value of Durable Bank Relationships: Evidence from Korean Banking Shocks

Using a large sample of exogenous events that negatively affected Korean banks during the 19971998 period, we examine the value of durable bank relationships in Korea. We show that adverse shocks to banks have a negative effect not only on the value of the banks themselves, but also on the value of their client firms, and that this adverse effect on firm value is a decreasing function of the financial health of both banks and client firms. Our results are concentrated in the second half of the sample period when Korean banks experienced severe difficulties.

Alternative mechanisms for corporate governance in Japan: An analysis of independent and bank-affiliated firms

Abstract This paper examines the corporate governance structure of 177 independent Japanese firms that do not have close ties to a main bank. Compared to a group of bank-affiliated firms, independent firms display higher levels of equity ownership by management, higher equity ownership by bank blockholders, smaller boards, but similar fractions of outside directors on the board. We document substantially better operating performance for independent firms. These results are consistent with the presence of substitute monitoring mechanisms that provide managers of independent Japanese firms with incentives to maximize firm value.