Increased-presence-of-foreigninvestors-and-dividen

IncreasedpresenceofforeigninvestorsanddividendpolicyofJapanesefirmsNaohikoBaba⁎BankforInternationalSettlements,Centralbahnplatz2,CH-4002Basel,SwitzerlandarticleinfoabstractArticlehistory:Received22October2007Accepted10April2008Availableonline16April2008ThispaperinvestigatestheimpactoftheincreasedpresenceofforeigninvestorsonthedividendpolicyofJapanesefirms.Achoice-to-paymodel,estimatedwitharandom-effectsbinaryprobitmethod,showsthatahigherlevelofforeignownershipisassociatedwithasignificantlyhigherprobabilityofdividendpayouts.Achoice-to-changemodel,estimatedwitharandom-effectsgeneralizedorderedprobitmethod,showsthatahigherlevelofforeignownershipisassociatedwithasignificantlyhigher(lower)probabilityofanincrease(nochange)individends,whilealarger1-yearincreaseisassociatedwithasignificantlyhigher(lower)probabilityofanincrease(decrease).©2008ElsevierB.V.Allrightsreserved.JELclassification:G35Keywords:DividendForeigninvestorsUnobservedheterogeneityGeneralizedorderedprobitRandomeffects1.Introduction“SomefundshaveboughtJapanesestocksinthehopeofsqueezingouthigherdividendsandpushingmanagementtoimproveitsreturnonequity.Analystssaidtheriseinforeignshareownershipreflectedexpectationsthatwesternshareholderculturewouldtakeroot(FinancialTimes,June192007).OneofthemoststrikingchangesinthegovernancestructureofJapanesefirmsinrecentyearshasbeenthegradualunwindingoftheKeiretsurelationship,aclosebusinessrelationshiptypicallyinterlockedbycross-shareholdings.Atthesametime,thepresenceofforeigninvestorshasincreasedsubstantiallysincethemid-1990s.1Indeed,accordingtotheTokyoStockExchange,theshareholdingratioofforeigninvestorsrosefrom9.4%(FY1995)to22.2%(FY2005),whiletheratiosofbanksandnon-financialfirmsfellfrom15.4%Pacific-BasinFinanceJournal17(2009)163–174*Tel.:[phone];fax:[phone].E-mailaddress:[e-mail].1AssuggestedbyKangandStulz(1996),Japanesefirmshadlongbeeninsulatedfromthepressurefromforeigninvestors.0927-538X/$–seefrontmatter©2008ElsevierB.V.Allrightsreserved.doi:10.1016/j.pacfin.2008.04.001ContentslistsavailableatScienceDirectPacific-BasinFinanceJournaljournalhomepage:firmssincethelate1990s.Keiretsurelationshipsareassociatedwithalowdegreeofinformationalasymmetrybetweenmanagersandshareholders(DewenterandWarther,1998).3Accordingly,undersuchrelationships,firmshavelittleneedtosignalfutureearningswithdividends.Foreigninvestors,incontrast,faceahighdegreeofinformationalasymmetryrelativetodomesticshareholders,andhencegenerallypreferdividends(abirdinthehand)toretainedearnings(abirdinthebush)becausethelattermightnevermaterializeasfuturedividends(canflyaway).Notsurprisingly,therefore,therecentincreaseinforeigninvestorsinJapanhasledtoanewwaveofshareholderactivisminJapan,withgreaterdividendpayoutsoneoftheirtoppriorities.4Theirmaintargetsarecash-richfirms.Afteryearsofcorporaterestructuringefforts,Japanesefirmshaverepaidmuchoftheirdebtsandrealizedrecordprofits.Foreigninvestorstypicallyarguethatinviewoftheiramplestockofcash,manyJapanesefirmshavenotreturnedenoughcashintheformofdividends.Facingsuchstrongpressurefromforeigninvestors,someJapanesefirmsarereportedtohavestartedtotakedefensivemeasures.5Intheory,thefreecashflowhypothesisproposedbyEasterbrook(1984)andJensen(1986)suggeststhatdividendsareusedtoreducetheagencycostsassociatedwithfreecashflowsexpost.However,therelationshipbetweenagencycostsanddividendpolicyisnotnecessarilyevidentexante.Inthisregard,LaPortaetal.(2000)presentthetwocompetingmodels:theoutcomemodel,whichholdsthatunderaneffectivesystemoflegalprotectionforshareholders,outsiderscanusetheirlegalrightstoforcefirmmanagerstopaydividends,6andthesubstitutemodel,whichpositsthatdividendpayoutsareregardedasasubstituteforpoorlegalprotectionforshareholders.SinceJapanisequippedwithbasiclegalprotection,andforeigninvestorsarearguablyoutsidersinmanyJapanesefirmsrelativetodomesticshareholders,foreigninvestors'recentaggressivedemandsformoredividendpayoutsaremorelikelytobeunderstoodwithintheframeworkoftheformermodel.7ThispaperattemptstoempiricallyevaluatetheeffectofanincreaseinforeigninvestorpresenceonJapanesefirms'dividendpolicy,aftercontrollingforrelevantfactorswidelyrecognizedintheliteratureasmaindeterminantsofdividendpayouts,aswellasunobservedheterogeneity(randomeffects).Thesefactorsincludeprofitmeasures,firmsize,thegrowthrateofassets,themarket-to-bookratio,andthedebtratio.Specifically,usingasampleof847JapanesefirmslistedonthefirstsectionoftheTokyoStockExchangethatdisclosedtheirfinancialstatementsonaconsolidatedbasisfromFY1997toFY2005,Ibeginbyinvestigatingtheeffectsoftheincreasedpresenceofforeigninvestors,measuredbytheshareofforeignownership,onJapanesefirms'decisionstopaydividends.Icallthismodelthechoice-to-paymodel.TheestimationmethodIuseistherandom-effectsbinaryprobitmethod.Thismodelshowsthatahigher(1-yearlagged)levelofforeignownershipisassociatedwithasignificantlyhigherprobabilityofdividendp