Journal of Finance and Economics
ISSN (Print): 2328-7284 ISSN (Online): 2328-7276 Website: http://www.sciepub.com/journal/jfe Editor-in-chief: Suman Banerjee
Open Access
Journal Browser
Go
Journal of Finance and Economics. 2015, 3(5), 97-104
DOI: 10.12691/jfe-3-5-3
Open AccessArticle

Foreign Institutional Ownership and the Valuation Effect of Investment and Payout Decisions

Rehman Mian1, and Kyoko Nagata1

1Department of Industrial Engineering and Management, Tokyo Institute of Technology, Tokyo, Japan

Pub. Date: November 13, 2015

Cite this paper:
Rehman Mian and Kyoko Nagata. Foreign Institutional Ownership and the Valuation Effect of Investment and Payout Decisions. Journal of Finance and Economics. 2015; 3(5):97-104. doi: 10.12691/jfe-3-5-3

Abstract

We study the effect of foreign ownership on firm valuation through strategic corporate decisions related to investment and payouts. Using data from Japan, we find evidence that foreign institutional investors lead to higher firm value through better and efficient investment and payout decisions. Our results indicate that through increased monitoring, foreign investors mitigate the possibility of sub-optimal investments and unnecessary payouts by the management. We also find that firms with increased foreign ownership use their cash reserves in ways that significantly compliments the operating performance. Furthermore, our results also support the conjecture of a recent decline in the influence of Japanese main banks on firm’s strategic decisions.

Keywords:
foreign ownership bank dependence Japan corporate governance firm value investment payout policy

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]  Aggarwal, R., Erel, I., Ferreira, M., & Matos, P. (2011). Does governance travel around the world? Evidence from institutional investors. Journal of Financial Economics, 100, 154-181.
 
[2]  Aoki, M., Patrick, H., & Sheard, P. (1994). The Japanese main bank system: An introductory overview. Oxford University Press.
 
[3]  Baba, N. (2009). Increased presence of foreign investors and dividend policy of Japanese firms. Pacific-Basin Finance Journal, 17, 163-174.
 
[4]  Brown, L. D., & Caylor, M. L. (2006). Corporate governance and firm valuation. Journal of Accounting and Public Policy, 25, 409-434.
 
[5]  Cho, M.-H. (1998). Ownership structure, investment, and the corporate value: An empirical analysis. Journal of Financial Economics, 47, 103-121.
 
[6]  Chung, K. H., Wright, P., & Kedia, B. (2003). Corporate governance and market valuation of capital and R&D investments. Review of Financial Economics, 12, 161-172.
 
[7]  Cremers, M. K., & Nair, V. B. (2005). Governance mechanisms and equity prices. The Journal of Finance, 60(6), 2859-2894.
 
[8]  David, P., Yoshikawa, T., Chari, M. D., & Rasheed, A. A. (2006). Strategic investments in Japanese corporations: Do foreign portfolio owners foster underinvestment or appropriate investment? Strategic Management Journal, 27(6), 591-600.
 
[9]  DeAngelo, H., & DeAngelo, L. (1990). Dividend policy and financial distress: An empirical investigation of troubled NYSE firms. The Journal of Finance, 45(5), 1415-1431.
 
[10]  Dittmar, A., & Smith, J. M. (2007). Corporate governance and the value of cash holdings. Journal of Financial Economics, 83, 599-634.
 
[11]  Dittmar, A., Smith, J. M., & Servaes, H. (2003). International corporate governance and corporate cash holdings. The Journal of Financial and Quantitative Analysis, 38(1), 111-133.
 
[12]  Ferreira, M. A., & Matos, P. (2008). The colors of investors' money: The role of institutional investors around the world. Journal of Financial Economics, 88, 499-533.
 
[13]  Gillan, S. L., & Starks, L. T. (2003). Corporate governance, corporate ownership, and the role of institutional investors: A global prespective. Journal of Applied Finance, 13, 4-22.
 
[14]  Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118, 107-155.
 
[15]  Goyer, M., & Jung, D. K. (2011). Diversity of Institutional Investors and Foreign Blockholdings in France: The Evolution of an Institutionally Hybrid Economy. Corporate Governance: An International Review, 19(6), 562-584.
 
[16]  Harford, J., Kecskés, A., & Mansi, S. (2012). Investor horizons and corporate cash holdings. Working Paper.
 
[17]  Harford, J., Mansi, S. M., & Maxwell, W. F. (2008). Corporate governance and firm cash holdings in the US. Journal of Financial Economics, 87, 535-555.
 
[18]  Hiraki, T., Inoue, H., Ito, A., Kuroki, F., & Masuda, H. (2003). Corporate governance and firm value in Japan: Evidence from 1985 to 1998. Pacific-Basin Finance Journal, 11, 239-265.
 
[19]  Hoshi, T., Kashyap, A., & Scharfstein, D. (1990). The role of banks in reducing the costs of financial distress in Japan. Journal of Financial Economics, 27, 67-88.
 
[20]  Hubbard, G. R. (1998). Capital-market imperfections and investment. Journal of Economic Literature, 36, 193-225.
 
[21]  Jensen, M. C., & Meckling, W. H. (1976). Theory of firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
 
[22]  Jeon, J. Q., Lee, C., & Moffett, C. M. (2011). Effects of foreign ownership on payout policy: Evidence from the Korean market. Journal of Financial Markets, 14(2), 344-375.
 
[23]  John, K., & Knyazeva, A. (2006). Payout policy, agency conflicts, and corporate governance. Working Paper.
 
[24]  Kang, J.-K., & Shivdasani, A. (1995). Firm performance, corporate governance, and top executive turnover in Japan. Journal of Financial Economics, 38, 29-58.
 
[25]  Kang, J.-K., & Shivdasani, A. (1999). Alternative mechanisms for corporate governance in Japan: An analysis of independent and bank-affiliated firms. Pacific-Basin Finance Journal, 7, 1-22.
 
[26]  Kang, J.-K., & Stulz, R. M. (2000). Do banking shocks affect borrowing firm performance? An analysis of the Japanese experience. The Journal of Business, 73(1), 1-23.
 
[27]  Kaplan, S. N., & Minton, B. A. (1994). Appointments of outsiders to Japanese boards Determinants and implications for managers. Journal of Financial Economics, 36, 225-258.
 
[28]  Min, B. S., & Bowman, R. G. (2015). Corporate governance, regulation and foreign equity ownership: Lessons from Korea. Economic Modelling, 47, 145-155.
 
[29]  Morck, R., & Nakamura, M. (1999). Banks and corporate control in Japan. The Journal of Finance, 54(1), 319-339.
 
[30]  Nagaoka, S. (2006). R&D and market value of Japanese firms in the 1990s. J. Japanese Int. Economics, 20, 155-176.
 
[31]  Nguyen, P. (2012). The impact of foreign investors on the risk-taking of Japanese firms. J. Japanese Int. Economics, 26, 233-248.
 
[32]  Pinkowitz, L., & Williamson, R. (2001). Bank power and cash holdings: Evidence from Japan. The Review of Financial Studies, 14(4), 1059-1082.
 
[33]  Pinkowitz, L., Stulz, R. M., & Williamson, R. (2012). Multinationals and the high cash holdings puzzle. Working Paper Series, 1-57.
 
[34]  Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50(5), 1421-1460.
 
[35]  Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, 11, 159-189.
 
[36]  Rozeff, M. S. (1982). Growth, beta, and agency costs as determinants of dividend payout ratios. Journal of Financial Research, 5(3), 249-259.
 
[37]  Shleifer, A., & Vishny, R. W. (1986). Large shareholders and corporate control. Journal of Political Economy, 94(3), 461-488.
 
[38]  Wei, Z., Xie, F., & Zhang, S. (2005). Ownership structure and firm value in China's privatized firms: 1991-2001. The Journal of Financial and Quantitative Analysis, 40(1), 87-108.
 
[39]  Weinstein, D. E., & Yafeh, Y. (1998). On the costs of a bank-centered financial system: Evidence from the changing main bank relations in Japan. The Journal of Finance, 53(2), 635-672.
 
[40]  Wu, X., & Xu, L. L. (2005). The value information of financing decisions and corporate governane during and after the Japanese deregulation. Journal of Business, 78(1), 243-280.