Foreign Institutional Ownership and Risk Taking

In this paper, we examine the relationship between foreign institutional ownership and risk taking, and between risk taking and firm performance. Foreign ownership is positively related to risk taking, which, in turn, has statistically and economically significant effects on corporate sales growth and firm performance. During the credit crisis, risk taking was also positively related to corporate earnings, and thus higher risk-taking firms had smaller cash flow shortfalls. However, foreign ownership does not have direct effects on corporate sales growth or firm performance. Moreover, strong risk avoidance cannot be explained by a bank-centered governance system after a series of banking deregulation steps and decreased bank ownership. Our results suggest that the increased presence of foreign investors in Japan improves corporate value via encouraging value-enhancing risk taking. To intensify the roles of foreign investors, policymakers must improve government regulations to enhance the import of good corporate governance led by foreign investors.