Corporate ownership structure and risk-taking: evidence from Japan

Abstract

We examine the relationship between ownership structure and corporate risk-taking in Japan over the sample periods of 2000 2010. Reflecting the ongoing changes in the ownership structure in Japan, we incorporate the various kinds of insider and outsider ownership in the analysis. Ownership such as concentrated ownership, ownership by closely related parties, financial institutions comprising banks and insurance companies and managers are categorized into inside ownership, while ownership by foreigners or financial institution such as investment trusts or pension funds are categorized into outside ownership. The ownership structure is found to have a different impact on the firm’s risk-taking behavior. The study shows that concentrated ownership or ownership by closely related parties affect the firm risks in a convex manner and encourages the firm management to take more risk when the firms have growth opportunities. On the other hand, ownership by financial institutions such as bank and insurance companies, does not seem to affect the firm risk level. This implies that the financial institutions fail to play their role of a shareholder monitor. When managerial ownership is allowed, it is found that Japanese managers’ incentives are aligned with those of shareholders. Contrary to the conventional entrenchment hypothesis, however, managers seem to take more risk as the share of managerial ownership increases. Foreign investors are found to enhance corporate risk-taking in a monotonic manner and do not bias corporate investment in a conservative direction in pursuit of their short-term gains. Domestic institutions such as investment trusts or pension funds are found to neither affect the firm risk level nor enhance the firm value.