A Diversification of Ownership Structure and its Effect on Corporate Performance: Unwinding and resurgence of cross-shareholdings and the role of surging foreign investors

The ownership structure of Japanese corporations has changed dramatically since the banking crisis in 1997, from an insider-dominated structure to an outsider-dominated structure. In this paper, we address the causes and effects of the dramatic change in the ownership structure, focusing on cross-shareholdings among listed firms and the increasing role of foreign investors. First, we show that a resurgence of cross-shareholdings in the middle 2000s was not a recurrence of reciprocal shareholdings between banks and business corporations, but was a new trend of reinforcing the ties among business corporations, based on an entrenchment motive. We also demonstrate that the scale of these reciprocal shareholdings is limited, so the ownership structure is unlikely to return back to the previously seen insider-dominated structure. Second, we show that portfolio selection made by foreign investors was closely related to the home bias and was also affected by corporate governance factors. We also illustrate that the growing presence of foreign investors has had a positive effect on corporate performance, even considering the aforementioned portfolio selection. Finally, we emphasize that this difference in the ownership structure brought in a dynamic process, namely, that differences in size, reputations in overseas markets, and corporate performance in the early 1990s led to a difference in the ownership structure through the portfolio preferences of institutional investors and the self-selection of corporations, and that this difference in the ownership structure enlarged the gaps in performance among corporations through the new structure’s effect of promoting discipline and management organization reform.