Yasushi Hamao

Institutional affiliation and the role of venture capital: Evidence from initial public offerings in Japan

Abstract The presence of venture capital in the ownership structure of U.S. firms going public has been associated with both improved long-term performance and superior “certification” at the time of the initial public offerings (IPOs). Many of the major venture capital firms in Japan are subsidiaries of securities firms that may face a conflict of interest when underwriting the venture capital-backed issue. In Japan, we find the long-run performance of venture capital-backed IPOs to be no better than that of other IPOs, with the exception of firms backed by foreign-owned or independent venture capitalists. When venture capital holdings are broken down by their institutional affiliation, we find that firms with venture backing from securities company subsidiaries do not perform significantly worse over a 3-year time horizon than other IPOs. On the other hand, we find that IPOs in which the lead venture capitalist is also the lead underwriter have higher first-day returns than other venture capital-backed IPOs. The latter result suggests that conflicts of interest influence the initial pricing, but not the long-term performance, of IPOs in Japan.

The components of the bid-ask spread in a limit-order market: evidence from the Tokyo Stock Exchange

Abstract This paper analyzes the components of the bid–ask spread in the limit-order book of the Tokyo Stock Exchange (TSE). While the behavior of spread components in U.S. markets has been extensively studied, little is known about the spread components in a pure limit-order market. We find that both the adverse selection and order handling cost components of the TSE exhibit U-shape patterns independently, in contrast to the findings of Madhavan et al. [Rev. Financ. Stud. 10 (1997) 1035] for U.S. stocks. On the TSE, there does not exist an upstairs market that allows large trades to be prenegotiated or certified as on the New York Stock Exchange (NYSE). This feature of the TSE provides a valuable opportunity to examine the relationship between trade size and spread components. Our results show that the adverse selection cost increases with trade size while order handling cost decreases with it.

Living with the "enemy": an analysis of foreign investment in the Japanese equity market

Abstract This paper studies the impact of foreign investment on domestic financial markets. In particular, it examines the empirical validity of some protectionist claims used by regulators to restrict foreign investment. These people argue that: (1) trading by foreign investors tends to increase market volatility more than trading by domestic investors; (2) foreign investors have more sophisticated investment technology than do their domestic counterparts, causing domestic investors to “lose out” to foreign ones; and (3) foreign investors tend to make investment decisions on the basis of short-term gains rather than long-term fundamentals, such as corporate dividend growth. We find no evidence supporting these claims from the Japanese experience. To the contrary, we find that foreign investors tend to be long-term contrarian players in the market.

Institutional affiliation and the role of venture capital: evidence from initial public offerings in Japan

The presence of venture capital in the ownership structure of U.S. firms going public has been associated with both improved long-term performance and lower underpricing at the time of the IPOs. In Japan, we find the long-run performance of venture capital-backed IPOs to be no better than that of other IPOs, with the exception of firms backed by foreign owned or independent venture capitalists. Many of the major venture capital firms in Japan are subsidiaries of securities firms that may face a conflict of interest when underwriting the venture capital-backed issue. When venture capital holdings are broken down by their institutional affiliation, we find that firms with venture backing from securities company subsidiaries do not perform significantly worse over a three-year time horizon than other IPOs. On the other hand, we find that IPOs in which the lead venture capitalist is also the lead underwriter have higher initial returns than other venture capital-backed IPOs. The latter result suggests that conflicts of interest influence the initial pricing, but not the long-term performance, of initial public offerings in Japan.

Changing patterns in corporate financing and the main bank system in Japan

This paper is the final draft for the joint research project on the Japanese Main Bank System and its Relevance for Developing Market and Transforming Socialist Economies, undertaken under the auspices of the World Bank EDI Program for the Study of Japans Development Management Experience, the Center on Japanese Economy and Business at Columbia University. This paper represents the views of the author and not those of the sponsoring institutions.

The Effects of the 1987 Stock Crash on International Financial Integration

This paper examines daily open-to-close returns of major stock market indices on the New York Stock Exchange, Tokyo Stock Exchange and the London Stock Exchange over the 1985-1990 period, which encompasses the October 1987 Stock Market Crash. We estimate volatility spillover effects across the 24 hour day using a GARCH-M model. We find evidence that volatility spillover effects emanating from Japan have been gathering strength over time, especially after the 1987 Crash. This may reflect a growing awareness by domestic investors of the economic interdependence of international financial markets since the 1987 Stock Market Crash.

Idiosyncratic Risk and Creative Destruction in Japan

The dramatic rise and fall of the Japanese equity market provides a unique opportunity to examine market-and firm-specific risks over different market conditions. The price behavior of Japanese equities in the 1990s is found to resemble that of U.S. equities during the Great Depression. Both show increasing market volatility and a prolonged large co-movement in equity prices. What is unique about the Japanese case is the surprising fall in firm-level volatility and turnover in Japanese stocks after its market crash in 1990. This large decrease in firm-level volatility may have impeded Japans capital formation process as it has become more difficult over the past decade for both investors and managers to separate high quality from low quality firms. Using data on firm performance fundamentals and corporate bankruptcies, we show that the fall in firm-level volatility and turnover in Japanese stocks could be attributed to the sharp increase in earnings homogeneity among Japanese firms and the lack of corporate restructuring.

Bank underwriting of corporate bonds evidence from Japan after the financial system reform of 1993

In 1993, the corporate bond primary market in Japan underwent a major change. The Financial System Reform Act allowed banks to enter the underwriting business by setting up securities subsidiaries. This paper analyzes yield differentials between issues underwritten by bank subsidiaries and those underwritten by securities houses. By estimating a regression model with correction for self-selection bias, we can distinguish between several hypotheses concerning the effect of bank underwriting of corporate bonds on their yields. We show that investors discount corporate bonds underwritten by bank-owned subsidiaries because they suspect conflict of interest. Bank-owned subsidiaries, on the other hand, try to avoid this conflict by underwriting bonds intended for institutional investors and bonds issued by firms with weak main bank ties. While investors’ suspicions of conflict of interest may put bank-owned subsidiaries at a disadvantage with respect to incumbent security houses, this study suggests that an aggressive entry strategy on the part of bank-owned subsidiaries has offset the disadvantage so far. In light of the recent repeal of the Glass Steagall Act, these findings will be of particular interest to observers of the changing nature of the securities business in the United States.

An analysis of bidding in the Japanese government bond auctions

We examine the bidding patterns and auction profits in the Japanese Government Bond (JGB) auctions and empirically test the predictions of auction theory. We find that the average profit in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are insignificant in determining auction profits. The winning shares of the U.S. dealers are positively related to auction profits, whereas the winning shares of their Japanese counterparts show a negative association. We also find that the share of winnings of Japanese dealers tends to be correlated with the share of winnings of their compatriot dealers but a similar relation is not found for U.S. dealers. Copyright The American Finance Association 1998.

Bank underwriting of corporate bonds: Evidence from Japan after 1994

We thank Goldman Sachs (Japan) for providing data; Serdar Dinç, Tadashi Kikugawa and participants of the Hugh Patrick Festschrift Conference for useful comments and conversation; and Mingzhu Wang for research assistance. Hamao gratefully acknowledges support from the Mitsubishi Trust and Banking Professorship at Columbia University. 1 ABSTRACT This paper examines a recent major change in the corporate bond primary market in Japan, namely bond underwriting by bank subsidiary securities firms. We analyze yields on corporate bonds at the time of issue, searching for evidence of conflict of interest, bank certification, distribution advantage, or aggressive entry strategy by banks. Bank subsidiaries have been successful in acquiring the underwriting business of firms which have been reducing their ties with main banks through decreasing loans, rather than serving firms for which the parent banks are the main banks. This tendency is especially clear in the more recent period. After controlling for firm and bond characteristics, the choice of underwriter (existing or bank subsidiary securities firms) generally does not have a material impact on yield spread. On the other hand, when the choice of underwriters is interacted with the maturities of corporate bonds, there is some evidence of net certification effect and/or aggressive pricing for bonds with longer maturities, which would have less competition with bank loans.