AAA Spark Meeting of Regions

Hedge Fund Activism in Japan Under the Stewardship and Corporate Governance Codes

• In Event: CSR-Sustainabilty Management

Abstract

[1] Objectives
This study analyzes activist funds during the second wave of activism in Japan. The second wave of activism arrived around 2013, when the Cabinet Office approved the “Japan Revitalization Strategy.” Amid increasing interest in corporate governance, capital efficiency, and the responsibility of institutional investors, the Stewardship Code and the CG Code were formulated in February 2014 and June 2015, respectively. Because these two codes require institutional investors to play a greater role in monitoring investee companies, greater chances emerged for activist funds to have other types of investors approve their proposals.

[2] Data/Methods
This study focuses on activist funds that submitted large-scale shareholding reports (acquisitions of 5% shares or more) from September 2014 to September 2019. The final sample consists of 28 activist funds that submitted 158 reports.

Our analyses are three fold. First, we apply the event study methodology to examine the impact of large-scale shareholdings by activist funds on the value of target firms. The event day in our study is the date on which the report of large-scale shareholdings by activist funds is submitted to the Financial Services Agency. We use the Fama-French 3 factor model (Fama and French, 1993) to estimate the cumulative abnormal returns (CARs). Then we conduct a multiple regression analysis using CAR as a dependent variable and variables related to the target firm’s financial condition, shareholder composition, and the attributes of activist funds as independent variables.

Second, to investigate factors that affect the probability of being targeted by activist funds, we perform a probit analysis by using financial indicators two years before the activist’s intervention. Third, to analyze changes in the financial indicators of the target companies, we conduct a simple difference-in-difference (DID) methodology to examine the change in target companies generated by activist funds’ large-scale shareholdings.

[3] Results
We find that the stock returns of target companies react positively to the intervention of activist funds. The positive correlation intensifies for funds classified as hostile or domestic, and when targets have high foreign shareholders’ ratios and low sales growth. Comparing the financial indicators of the targets of the pre- and post- acquisition periods of large blocks of shares by activist funds, return on assets tends to decline more than that of their matching peer control companies, while the dividend payout ratio tends to rise more.

Authors

• Hiroaki Miyachi, University of Tokyo

• Fumiko Takeda, University of Tokyo