Corporate Governance and Firm Performance: An Implication from Japanese Listed Family Firms
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Hokuto Dazai
,
Takuji Saito
Abstract
The most distinctive characteristic of Japanese heir managing firms is that founding families keep sending top management without influential voting rights in a substantial number of cases. Why is it possible? To answer the question, we draw attention to the huge difference of managerial ownership of heir managing firms and listed non-family firms in Japan. Does management ownership (vs. family ownership) drive performance in Japanese heir managing firms? Our regression analysis reveals that management ownership is positively correlated with firm performance, as measured by ROA and ROE. Importantly, this positive effect is observed even in firms with low family ownership, suggesting that management incentives play a crucial role in driving performance. Our research suggests that management’s equity incentives may play a crucial role in driving firm performance, even in the absence of strong shareholder-oriented corporate governance in stakeholder systems.
Appendix Construction of Dataset, and Supplementary Tables
Since comprehensive data sources on the ownership and management of founding families are not available in Japan, we manually collected data from several sources. Our sample covers the period from 1991 to 2010, and firms listed on the first section and the second section in Japanese stock exchanges.
To construct our dataset, we first identified the founders of the firms by using “Nihon Kaishashi Soran” (firm history compendium) published by Toyo Keizai Shinposha, each company’s website, and “Yuka Shoken Hokokusho” (annual securities report). The Nihon Kaishashi Soran is a compilation of the histories of 3,072 listed firms as of 1995. For firms not listed here, we checked their websites for information about their founders. In cases where we could not find information on the founder through these processes, we use Yuka Shoken Hokokusho and treated the manager of the firms at the time it was established as the founder.[67]
Second, we identified whether the founders are still alive or not from “Nikkei Telecom 21” from Nihon Keizai Shinbun.[68] Nikkei Telecom 21 provides a searchable database of newspaper articles from 1949 onward. In this paper, we search all articles for each founder and identify the death of each founder by the presence or absence of obituaries. In cases where the founder’s birth year was extremely early and the death year was assumed to be before the period covered, the founder was assumed to have died regardless of whether an obituary was found or not.
Third, we identified senior managers and large shareholders of each firm for each fiscal year. To identify the president and chairman, we used the “Yakuin-Shikiho” published by Toyo Keizai Shinposha. Yakuin-Shikiho provides a list of directors of listed firms, along with their dates of birth, education, and employment history. The top 10 largest shareholders and their shareholding ratios of each firm were collected from the Development Bank of Japan’s “Corporate Financial Databank”. Corporate Financial Databank compiles financial figures of the firms and many other disclosure information.
Finally, we identified the family relationships between the founders and the senior managers and major shareholders of each firm using Nikkei Telecom 21 and Yuka Shoken Hokokusho. In Japan, when there is a change of presidents, it is often mentioned in newspaper articles when there is a blood relationship between the predecessor and successor, and Nikkei telecom allows us to confirm the blood relationship of the founding family. In addition, we can confirm the blood relationship of the founder’s family members in the Yuka Shoken Hokokusho, since it is required to include information on blood relatives within the second degree of consanguinity among the directors. In addition, many founding families hold shares through private companies or foundations. Whether or not these shares are held by the family members was identified from “Tairyo Hoyu Hokokusyo” (large shareholding reports) and Yuka Shoken Hokokusyo. A person who owns 5 % or more of the shares of a listed company is obliged to report on the large shareholding report, and must also declare his/her spouses and his/her asset management company as joint holders.
In the following, Appendix Table 1 summarizes the management ownership of heir managing firms summarized in Table 1 for each level of family ownership, and Appendix Table 2 summarizes the definitions of the main variables used in the analysis.
Relation between management ownership and family ownership of heir managing firm.
| Subsample = | Heir managing firm | ||
|---|---|---|---|
| Family ownership = | <5 % | <10 % | <20 % |
| Firm-year observations = | 3,549 | 5,200 | 7,271 |
| Mean | 1.260 % | 1.831 % | 2.831 % |
| Min | 0.003 % | 0 % | 0 % |
| 10 %ile | 0.106 % | 0.146 % | 0.191 % |
| 25 %ile | 0.340 % | 0.461 % | 0.595 % |
| Median | 0.926 % | 1.297 % | 1.779 % |
| 75 %ile | 1.831 % | 2.545 % | 3.935 % |
| 90 %ile | 2.878 % | 4.366 % | 7.143 % |
| Max | 5.921 % | 9.989 % | 17.765 % |
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This table shows the distribution of manager ownership for heir managing firm with family ownership less than 5 %, 10 %, and 20 %. Heir managing firm is a firm where the founder’s heir is a president or chairman after the founder died. The sample consists of the firms listed on the first section and the second section in Japanese stock exchanges from 1991 to 2010, with financial firms and public utility firms excluded.
Variables definitions.
| Variables | Definitions |
|---|---|
| Family firm variables | |
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| Founder firm | Equals one if founder is alive. |
| Heir managing firm | Equals one if founder’s heir is a president or chairman after founder died. |
| Non-heir managing firm | Equals one if founding family is not a president or chairman, but the top 10 shareholder of the firm after founder died. |
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| Ownership variables | |
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| Management ownership | Ratio of shares held by the largest shareholder of president and chairman to total shares. |
| Family ownership (less family-manager ownership) | Ratio of shares held by founding family as a group within the 10 largest shareholders to total shares (minus management ownership held by founding family). |
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| Performance variables | |
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| ROA | Ratio of operating income before tax and interests to book value of assets. |
| ROE | Ratio of net income to book value of net assets. |
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| Control variables | |
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| (Log of) assets | (Log of) book value of assets. |
| Leverage | Ratio of the sum of short-term debt and long-term debt to total assets. |
| (Log of) firm age | (Log of) years since first incorporated. |
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This table shows the definitions of the variables used in the analysis of chapter 3.
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