Outline of Research Project

In the latter half of the 1990s, the macroeconomic environment changed drastically and the government implemented deregulation and regulatory reforms at a rapid pace. This prompted many Japanese companies to embark on dynamic experiments in business strategy, organizational structure, and corporate governance scheme, and the move has drawn much attention both in Japan and abroad. Inviting leading researchers and practitioners in this field, RIETI's research team on corporate governance, headed by Faculty Fellow MIYAJIMA Hideaki, has continued work on this project, focusing primarily on how the governance structures of Japanese companies have been reformed since the latter half of the 1990s and the resulting impacts on their business performance (see Related Past Research for details). Research activities for the current fiscal year ending March 2007 are expanding previous research in the pursuit of two objectives:

The research team has until now worked on developing a database containing the time series of the number of mergers and acquisitions (M&As) by type as well as information concerning financial and governance attributes of acquirers and acquired companies. Miyajima (2006) has sorted out perspectives addressing the rise in the number of M&As and its historical and international dimensions, while Arikawa and Miyajima (2006) has attempted to quantitatively analyze factors behind the increase in the number of M&As between domestic companies from 1999 onward. In the fiscal year ending March 2007, the research team is working on issues that could not be sufficiently clarified in the preceding fiscal years. Means to address these issues include:

• Examining recent cutting-edge research trends as to what theoretical frameworks have been used in past research on M&As (primarily from the United States) to identify factors prompting the rise and economic roles of M&As, and what the empirical analysis has clarified.
• Based on this analyzing whether the recent spate of Japanese M&As has led to increases in corporate value and, if so, what types of M&As spur these increases, by estimating Cumulative Abnormal Returns (CAR), a standard method for examining this.

Of the range of issues relevant to corporate governance, internal governance mechanisms (board of directors, compensation scheme), and external governance mechanisms (shareholder/creditor discipline, market for corporate control through M&As) have already been subjected to extensive study and the research team has also presented findings. However, there still remain quite a few problems concerning the governance of Japanese companies. For instance, key issues in the light of empirical analysis of Japanese companies include:

• Ownership structure of Japanese companies with cross shareholding on the decline
• Governance problems with emerging companies and listed subsidiaries
• Interrelationships between internal governance and business portfolios / internal organizational structures (comprehensive understanding of finance, corporate governance, and organizational structures)

These issues will eventually lead to the issue of leveling corporate governance standards in East Asian countries. The research team defines this fiscal year as a period to carry out basic studies toward exploring the frontier of research in the analysis of corporate governance. Working together with the Ministry of Economy, Trade and Industry, more specifically with those at the Competition Enhancement Office of the Industrial Organization Division, we aim to uncover key issues concerning corporate governance and to provide new directions for empirical analyses and data development. As part of this endeavor, the research team is attempting to identify the main debates concerning three issues:

1. What theoretical frameworks exist to analyze the impacts of governance structures on corporate performance and to what extent has progress been made on empirical examinations thereof?
2. What is the mechanism through which governance structures impact corporate performance?
3. Reexamination of the legal and financial frameworks advocated by La Porta, Lopez, Shleifer, and Vishny (LLSV). (including evaluation of the U.S. Sarbane-Oxley Act)

Through these activities, the research team aims to explore the frontier of research in the analysis of corporate governance that has significant policy implications with respect to cutting edge research trends and issues.