Joint Meeting of the Mid-Atlantic and Northeast Regions

Effects of Shareholder Proposals on the Market Value of Japanese Firms

• In Event: Firm Valuation

Abstract

The purpose of this study is to investigate the effect of shareholder proposals on the market value of Japanese firms for 2017- 2021. Since the mid-2010s Japan has been in the “second wave of activism.” There is a growing trend for shareholders, led by institutional investors, to strongly seek their own interests in companies. The number of companies that have received shareholder proposals has more than doubled between 2014 and 2020.

This study focuses on the following three events: (1) 132 announcements of receipt of shareholder proposal, (2) 128 announcements of board opinion on shareholder proposal, and (3) 124 exercises of voting rights on shareholder proposal. The information related to these events were collected from the Quick Money World. The buy and hold abnormal returns (BHAR) were calculated to measure the impact of these events on stock returns of investee companies. The multiple regression was performed to examine factors that affect the BHAR. Stock price data and other firm-specific financial data were retrieved from Bloomberg.

The main findings are as follows: (1) Announcements of receipt of a shareholder proposal positively affect stock prices of investee companies. (2) Announcement of the board’s opinion on a shareholder proposal have no effect on stock prices of investee companies. (3) Rejection of a shareholder’s proposal has a negative impact on stock prices of investee companies. (4) Market reactions to proposals for the election and dismissal of the Board of Directors are not different from market responses to other proposals. (5) The higher the shareholding ratio of the proposing shareholder, the higher market responses to the shareholder’s proposal and the greater the disappointment when the proposal is rejected. (6) The higher the foreign shareholding in a company, the greater the expectation of a shareholder proposal and the greater the disappointment when it is rejected. (7) When a shareholder proposal is rejected, the lower the approval rate, the greater the negative impact on the market value of investee companies.

The results of this study indicate the characteristics of the second wave of activism in Japan. While proposals related to the election and dismissal of directors still have a large impact, other proposals are becoming more influential as shareholder proposals diversify. With the formulation of the Stewardship Code, there has been an increase in the number of proposals by institutional investors, suggesting that proposals are no longer necessarily limited to those by the most influential institutional investors.

Authors

• Fumiko Takeda, Keio University

• Ryo Sato, University of Tokyo