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Evolving corporate governance and the dividends behaviour regime in Japan

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Abstract

This study investigates empirically the implications which the changing ownership structure and control transfers in the Japanese corporate market may have for the dividend policy of listed firms. The results show that firms with more concentrated ownership may distribute fewer dividends, as ownership concentration reduces distribution pressure from the capital market. Moreover, we show that institutional shareholding, both financial and non-financial, enables corporations to pay lesser dividends and also that the unwinding of the cross-shareholdings allows for efficiency gain and provides impetus to pay higher dividends. The recent pattern of increasing individual shareholding, both of domestic and foreign private individuals, is consistently associated with a higher dividend payment. Furthermore, managerial ownership has negative effects on dividends payouts and is not associated with the earnings of firms. The results suggest that government ownership does not have any significant impact on the payment of dividends. Moreover, our results support the principle of the dividends relevancy and the choice of an appropriate dividends policy affects the value of the firm.

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Notes

  1. This puzzle is aptly stated by Black himself: “The harder we look at dividend the more it seems like a puzzle with pieces that just don’t fit together (Black 1976).”

  2. Equity ties are often reciprocated among these firms so that the cross-holding of shares is quite common (Roe 1994).

  3. Cross-shareholdings by financial and non-financial firms strengthen the stability of firm management by decreasing the threat of hostile takeovers and maintaining long-term business relationships, and they permit managers to develop operations according to a long-term perspective. This perspective is likely to be consistent with the interests of the debt holders, who have greater concerns about the default risk of the firms (Shuto and Kitagawa 2011).

  4. Since the mid-1990s, foreign ownership of Japanese firms has been rising, climbing to over 18 % of all listed Japanese shares at the end of March in 2000 (Stock Distribution Survey 2001).

  5. Cross-shareholdings among large listed Japanese firms have declined to 10.5 % of all outstanding shares in 1999 from around 17 % in the early 1990s and 18 % in 1987 (Japan Economic Journal 2001).

  6. Because of events such as the bad debt and banking crises, which have severely damaged the ability of banks to support troubled affiliated firms (Sheard 1997; Fukao 1999).

  7. The corporate income tax rate has long been identified as a potential determinant of capital structure decision. Firms will prefer to have more debt than equity, because of the tax shield on interest. Deangelo and Masulis (1980), Ross (1985), and Leland (1994) have shown that in the presence of taxation, it is better for a firm which has safe, tangible assets and plenty of taxable income to rely on debt in order to avoid higher tax payments. Rajan and Zingales (1995) and Booth et al. (2001) have estimated a negative relationship between the corporate income tax rate and the debt ratio in some cases and state that tax benefits vary in developing countries and do not affect the capital structure of the firms. But in developed countries, the estimated impact is positive. In Japan, being one of the developed economies, we expect that the corporate income is one of the potential determinants of capital structure and, hence, the dividends.

  8. Himmelberg et al. (1999) have argued that regression of firm performance on ownership variables is potentially miss-specified because of the presence of the firm heterogeneity. Specifically, if some of the unobserved determinants of firm performance are also determinants of ownership, then ownership might spuriously appear to be a determinant of firm performance.

  9. By using the GMM estimation method, one is better able to control for the effects of missing or unobserved variables. Specifically, by the inclusion of the lag of the dependent variable as an explanatory variable in the estimated equation, the effects of the omitted variables can be captured. The effects of the omitted variables are driven by either individual time-invariant variables or period individual-invariant variables. The individual time-invariant variables are variables that are the same for given cross-sectional units over time but vary across cross-sectional units (intangible assets, managerial skill). The period individual-invariant variables are variables that are same for all cross-sectional units at a given time but vary over the time (macroeconomic scenario). All these omitted variables may correlate with the independent variable. Hence, the GMM technique employed in the analysis overcomes the possible heterogeneity and omitted variable problems, which often arise with cross-sectional analysis. Furthermore, we incorporate a year dummy to control for unobserved macroeconomic effects.

  10. We have also estimated the models with the two lags of the dependent variable, but the result was suffering from the identification issue. Therefore, we have considered only the one lag of the dependent variable in all the underlying models.

  11. For detailed discussion on the Durbin-Wu-Hausman test, see Cameron and Trivedi (2009).

  12. We also estimated the extended version of the model specified in Eq. (6) taking into account the FIT, NFIT, and PFIT as additional explanatory variables. The results suggest that the dividend payments-related variables are relevant to the market value of the firm. Furthermore, in this specification, the FIT and NFIT are statistically significant and negatively related to the Tobin’s q ratio, whereas the PFIT has a positive and statistically significant impact on the market value measure of the firm. The signs and significance of other variables such as SIZE, FIS, NFIS, FRGN, PRVT, INSIDE, and GOVT are similar to the results shown in Table 7. However, the results are not reported for the sake of space.

  13. Although we reveal that stable shareholdings prefer smooth business relations with their client firms, we cannot determine whether such management is efficient or constitutes rational behaviour in terms of a firm’s value. This issue is beyond the scope of the study and should be addressed in future research.

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Acknowledgments

The authors would like to thank the anonymous referees and Prof. Pier Luigi Porta (Editor-in-Chief) for making useful comments to improve this paper. This work was supported by the JSPS KAKENHI Grant Number 25380384, JSPS Grant-in-aid Number 2503309.

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  1. Graduate School of Economics and Management, Tohoku University, Sendai, Japan

    Shaif Jarallah & Wali Ullah

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  1. Shaif Jarallah
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Correspondence to Shaif Jarallah.

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Jarallah, S., Ullah, W. Evolving corporate governance and the dividends behaviour regime in Japan. Int Rev Econ 61, 279–303 (2014). https://doi.org/10.1007/s12232-014-0195-7

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