Does Regulation Matter?: Effects of Corporate Governance Reforms on Relational Shareholding in Japan

Through Abenomics, new regulations based on the "comply or explain" principle were introduced to alter the deep-rooted relational shareholding (seisaku-hoyu) practice among Japanese firms. The stewardship code encourages institutional investors to engage in corporate management, and one of the indicators of such engagement is the management of a firm's financial policy, such as the firm's policies for securities holdings and payouts. Regarding relational shareholding, the Corporate Governance Code introduced stricter corporate disclosure requirements, including guidelines for the self-assessment of the appropriateness and economic rationale for relational shareholding. We explore the consequences of the new regulation by using unique data on firms with high relational shareholding (the so called bedrock firms, "Ganban Kigyo"). Our results provide evidence that following the reforms, Japanese corporations began to actively reduce their relational shareholding. The incentive to reduce relational shareholding was constrained by intercorporate relationships. However, this constraint was also mitigated through the reforms. We also provide evidence that despite the expected outcome of Abenomics, corporate policies in firms that reduced their relational shareholding are likely to result in an increase in cash holdings and in dividend payouts, while R&D, M&A and CAPX are left unaffected.