DBJ Discussion Paper Series, No. 1907

Corporate Governance Compliance and Firm Value:
A Cultural Perspective

Masanori Orihara（University of Tsukuba）
Arman Eshraghi（Cardiff University）

October

2019

Discussion Papers are a series of preliminary materials in their draft form. No quotations,reproductions or circulations should be made without the written consent of the authors in order toprotect the tentative characters of these papers. Any opinions, findings, conclusions or
recommendations expressed in these papers are those of the authors and do not reflect the views of
the Institute.

Corporate Governance Compliance and Firm Value:
A Cultural Perspective
Masanori Orihara1

Arman Eshraghi2

This version: October 12, 2019
Abstract
We show the corporate governance reforms introduced by the Japanese government since 2014
have not succeeded in increasing aggregate firm value. These policies, of which voluntary
disclosure in the form of ‘comply or explain’ is a major element, have inadvertently led toovercompliance by target firms listed in the first section of the Tokyo Stock Exchange as well
as a range of non-target firms. We argue this overcompliance behaviour is, inter alia, correlatedwith the cultural values of ‘conformity’, ‘respect for authority’ and ‘power distance’, whichpermeate the Japanese corporate culture. This results in smaller firms, which are typically notlisted on the first section of the exchange, following the compliance behaviour of larger firms
listed on the first section in the same industry sector. Importantly, this pressure to follow in thesteps of leading firms is to the detriment of board effectiveness and shareholder value. We
document a larger reduction in the market value of young and R&D intensive firms, and firms
appointing outsider directors with lower advising quality. These findings highlight the risks inadopting corporate governance policies without due attention to cultural nuances.
JEL classifications: G34, M14
Keywords: Voluntary disclosure, National culture, Corporate governance, Compliance, Japan1
2

University of Tsukuba, Japan, email: orihara@sk.tsukuba.ac.jp
Cardiff University, UK, email: eshraghia@cardiff.ac.uk

We are thankful to Iftekhar Hasan, Takashi Hatakeda, Lynn Hodgkinson, Kevin Holland, Katsuhiko
Muramiya, Wataru Ohta, Junyu Saito, Takashi Yoshida, Qingwei Wang and the participants at Cardiff
Empirical Finance Conference, Cardiff-Newcastle-Xiamen Conference, Gregynog Symposium,
Western Economic Association International Conference and seminars at Osaka University, Japan,
University of St Andrews, UK and University of Leeds, UK. Masanori Orihara gratefully acknowledges
financial support from the Japan Society for Promotion of Science (KAKENHI-18K12819), and Arman
Eshraghi gratefully acknowledges support from the Research Institute of Capital Formation at theDevelopment Bank of Japan.
11. Introduction
Voluntary disclosure policies aimed at improving corporate governance outcomes haveincreasingly been adopted across the world (e.g., Zattoni and Cuomo, 2008). The generalargument in favour of voluntary disclosure regimes such as ‘comply or explain’, as opposed tohard regulations such as the Sarbanes-Oxley Act of 2002, is that the former allows for a more
dynamic and flexible approach to corporate governance. Comply or explain approaches are“formally nonbinding and voluntary in nature, issued by multi-actor committees, flexible intheir application, built on the market mechanism for evaluation of deviations and evolutionary
in nature” (Haxhi and Aguilera, 2014). Therefore, numerous countries have adopted voluntary
corporate governance policies with the goal of enhancing firm value and improving the general
governance environment of their corporate sectors.
Broadly speaking, however, empirical support for the comply or explain approach is mixed andinconclusive (see, e.g., Cuomo, Mallin, and Zattoni, 2016; Davies et al., 2011). 3 Firstly,
research evidence shows that complying firms often do so more in ‘form’ than in ‘substance’(Krenn, 2014), and non-complying firms use standard ‘boilerplate’ statements (Arcot, Bruno
and Faure-Grimaud, 2010), possibly due to unenforceability of such regulations. Second andmore closely related to our paper, recent studies point out that country-level factors can mitigate
the effectiveness of voluntary codes (Cuomo, Mallin, and Zattoni, 2016; Price, Román, andRountree, 2011). We extend this literature by introducing a so far underexplored factor: thesocio-cultural pressures to ‘conform’ in the corporate sector.
This paper provides evidence from the recent corporate governance reforms in Japan to showthat such soft governance approaches can be less effective in certain cultural environments.
Primarily, we argue that due to specific attributes of the Japanese national culture such as very
high levels of conformity, respect for authority, power distance, uncertainty avoidance, andlong-term orientation, an unusually high proportion of Japanese firms comply with thevoluntary code of governance and other related policies introduced since 2014 (hereafterreferred to as the ‘Code’). Importantly, we illustrate that even listed companies not subject tothis regulation tend to ‘overcomply’. In other words, there is robust evidence of overcompliance3Some studies report that such approaches increase firm value. See, for example, Goncharov, Werner andZimmermann (2006) in Germany; Fernández‐Rodríguez, Gómez‐Ansón and Cuervo‐García (2004) in Spain; andDahya and McConnell (2007) in the UK. In contrast, for example, Price, Román, and Rountree (2011) report noassociation between compliance to the voluntary governance code in Mexico and firm performance. The survey
by Cuomo, Mallin, and Zattoni (2016) illustrates the range of mixed results in this literature.

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to the Code across all listed firms in Japan and, crucially, this is associated with a marked
decline in firm value following the introduction of the Code.
The overcompliance problem that we illustrate is theoretically related to the Japanese culturalpreference for loyalty, deference and respect to regulatory authorities, to leading firms in the
sector, and to what is regarded, implicitly or explicitly, as ‘best practice’. While the traditional
corporate governance research often draws on the classic agency problems between managers
and shareholders (lack of loyalty and the principal-agent theory a la Jensen and Meckling,1976), we argue that the Japanese evidence is more consistent with the agency problems
discussed in Morck (2008). The latter suggests that too much loyalty between the agent and theprincipal may lead to similarly adverse effects. In the Japanese context, we argue this loyalty is
fuelled by longstanding socio-cultural values that are unique to this country.
The corporate governance Code we study in this paper was finalized by the Japanese Financial
Services Agency and the Tokyo Stock Exchange (hereinafter, TSE) in December 2014 andimplemented in June 2015. According to the Code, firms have to comply with a set of principles
or explain their reasons for non-compliance. One of the Code’s key requirements is that firms
need at least two outside directors on their board. This requirement, however, applies only to a
subgroup of Japanese firms: those listed on the first section (T1 as in Tier-1) or the second
section (T2 as in Tier 2) of the TSE – an overall group we refer to as T12. In our sample, T1
firms consist of 66% (64%) of TSE (all listed) firms. T2 firms consist of 16% (15%) of TSE(all listed) firms. Finally, firms listed in other sections of the TSE, which we refer to as nonT12, make up 19% (18%) of TSE (all listed) firms, respectively.
While the requirement to have two outside directors might appear inconsequential relative to
many other countries, it has a considerable potential to influence corporate governance in Japan.
Traditionally, boards in Japan have had far fewer outside directors than other countries. This,
among other reasons, can be attributed to the distinct corporate structures historically prevalentin Japan such as the interlocking business relationships and shareholdings commonly referred
to as the Keiretsu. To illustrate this, as of 2012, 45% of Japanese firms had no outside directors
and 30% had only one outside director on their boards. Thus, only 25% of firms had two or
more outside directors. Against this backdrop, the Code was introduced in 2014 and targeted3T12 companies with less than two outside directors which made up 54% of all listed firms inJapan.
Based on our findings, between 2013 and 2017, the mean number of outside directors increased
at an accelerated pace from 1.3 to 2.7 for T1 firms and from 0.8 to 2.1 for T2 firms. This trend
can be seen in Figure 1. The growth within a five-year period was much faster than the relatively
static number of outside directors in the preceding decade from 2003 to 2013. Surprisingly,
non-T12 firms also reacted to the Code. 18% of these firms had two or more outside directors
in 2013 but this rose to 31% in 2014 and further to 52% in 2017. The Code affected non-T12
firms more than T12 firms in the sense that prior to the introduction of the Code, we observe
virtually no change in the number of outside directors. This is in contrast to T12 firms thatexperienced a gradual rise. This suggests that the introduction of the Code had a spillover effecton firms that were not the direct target of the policy.
~ Figure 1 about here ~Next, we examine the impact of the Code on firm value. Using an Instrumental Variableapproach, we show that an increase in the number or the ratio of outside directors, induced by
the Code, has an opposite effect and reduces firm value as measured by Tobin’s Q. In addition,
we observe this negative association among both T1 and non-T12 firms. This can mean that thepotential signalling of competence by non-T12 firms, proxied by their compliance behaviour,
is not positively interpreted by the market.
Further tests yield three sets of results. First, non-T1 firms comply with the Code following thecompliance of their industry leaders. i.e., T1 firms. Our findings demonstrate that thiscompliance herding reduces the follower firms’ market value. Second, market values of firmsthat cannot appoint sufficient outside directors declines among non-T1 firms more than T1
firms. These findings suggest that conformity pressures from industry leaders have a negative
effect on these followers. Third, value of R&D intensive firms listed on the T1 section decreases.
Given these firms are likely to be leaders among leaders, this finding suggests that leaders
themselves also suffer possibly due to the respect for authority.

4

Finally, we examine the impact of the Code on board size. The implementation of the Codeseems to have had an unintended consequence. Average board size increased because firms
retained insiders on boards when appointing outsiders. We find these larger boards areassociated with a reduction in firm value. Although this negative association is widely known
from extensive studies since Yermack (1996), it can further illustrate how overcompliance to
the Code has reduced shareholder value in our setting. Crucially, this negative effect is observed
only among T1 firms. A policy recommendation based on this finding is that imposing a
restriction on board size can mitigate problems in comply or explain governance regimes.
Our paper makes several contributions to the corporate governance literature. Firstly, we extend
the body of work on the impact of voluntary corporate governance codes on board size, board
independence and firm value (e.g., Cuomo, Mallin, and Zattoni, 2016). Our findings are incontrast to Fauver et al. (2017) who find that comply or explain increases firm value. Similarly,
Luo and Salterio (2014) report that Canadian firms exploit the flexibility of the comply or
explain regime strategically and thus increase their firm value. We posit that these differencesin governance outcomes between Japan (with its highly homogenous culture) and countries
such as Canada (with their diverse and fluid cultures) can be explained reasonably well in thecontext of socio-cultural differences.
Secondly, therefore, we contribute to the literature on the emerging role of culture in explaining
corporate finance and governance outcomes. 4 Our findings are related to Li and Harrison(2008) who study how national culture affects board structures but do not examine theconsequence of this on firm value. More closely, our results are in line with Frijins, Dodd andCimerova (2016) who show the cultural diversity of board of directors can reduce firm value.
Thirdly, we illustrate that firms appointing other firms’ current or former executives experiencea smaller reduction in firm value. This contributes to the body of work on the positive valuation
effects of CEO director appointments (e.g., Fahlenbrach, Minton, and Pan, 2011; Fich 2005,
Fahlenbrach, Low, and Stulz, 2010).

4

For example, there are studies on culture and merger and acquisitions (Ahern, Daminelli, and Fracassi, 2015),
executive compensation (Bryan, Nash, and Patel, 2015), internal control disclosures (Hooghiemstra, Hermes andEmanuels, 2015), firm growth (Boubakri and Saffar, 2016), and international portfolio holdings (Karolyi, 2016).
See Aggarwal et al. (2016) for a review.

5The rest of this paper is organized as follows. Section 2 provides policy background on theJapanese corporate governance and the cultural attributes relevant to the study. Section 3
develops the hypotheses, presents the empirical design and introduces the data and descriptive
statistics. Section 4 presents the main empirical findings and Section 5 concludes.

2. Background2.1. The Japanese Corporate Governance CodeAs in other countries, accounting and governance scandals in Japan have encouraged policy
discussions on issues such as board independence. In 2011, Japan experienced two consecutive
accounting scandals: the Olympus Corporation scandal in July and the Daio Paper Corporation
scandal in September. These events led to widespread international concerns about the qualityof Japanese corporate governance, which, in turn, stimulated a policy debate on board
independence. At this time, still about half of Japanese firms had no outside directors.
Following extensive legislative attempts in the following years, in August 2012, the Corporate
Law subcommittee decided that it would not mandate companies to have an outside director.
Instead, the proposal mandated firms to explain the reasons when they choose not to have an
outside director. This was the first time in Japan that comply or explain requirements appeared
in a series of policy discussions. The government accepted this proposal in November 2013, it
passed into law (the Code) in June 2014 and came into force in June 2015.
In fact, the Code was part of a larger policy package introduced by Prime Minister Shinzo Abe
since December 2012 including legal reforms and changes in macroeconomic policy(informally referred to as Abenomics). The code consists of five General Principles, 30
Principles, and 38 Supplementary Principles; thus 73 items in total. All publicly listed firms aremandated to comply, or explain their non-compliance, with all the five General Principles. In
contrast, only firms listed on the first or second sections of the TSE are subject to the remaining
68 principles. Compliance or lack thereof must be reported in the corporate disclosures thatfirms file annually following their annual shareholder meetings.
In May 2015, a concurrent requirement came into force, which required firms to appoint at least
one outside director. If firms chose not to make this appointment, they had to explain theirreasons at the general shareholders’ meetings. More precisely, the requirement applied only to‘large firms,’ defined as having a stated capital of 500 million yen or liabilities of 20 billion yen.
6

97% of firms in our final sample are classified as ‘large firms.’ The law also introduced theaudit and supervisory committee system. This is an elective framework. If a firm adopts it, thefirm must place an audit and supervisory committee inside its board. At least three directors
need to be on this committee and a half of them must be outside directors. These directors
monitor other directors. Non-committee member directors can oversee decision making. Thus,
the framework encourages firms to separate management and monitoring inside the board.
2.2. Culture in Corporate Governance
The finance literature has recently opened up to discussing and measuring the impact of culture
in finance. A seminal study in this area is by Grinblatt and Keloharju (2001) who documentthat investors are more likely to hold, buy, and sell the stocks of Finnish firms that are
geographically proximate to the investor, that communicate in the investor's native tongue, andthat have CEOs of the same cultural background. Culture for their 97 publicly-traded Finnish
firms is identified by the CEO's name and native tongue (Finnish or Swedish).
Similarly, Chui, Lloyd, and Kwok (2002) show that firms in countries with high scores on thecultural dimensions of conservatism and mastery – both adapted from Hofstede's construct by
Schwartz (1994) – are associated with lower debt ratios. Shao, Kwok, and Guedhami (2010)
associate these same values with higher dividend payouts. The propensity for corporate
investment in longer-term, riskier projects or to employ excess cash for R&D expenditures isfurther associated with firms domiciled in countries with higher scores on Hofstede's
individualism index (Shao, Kwok, and Zhang, 2013).
This trend has also spilled over to corporate governance research. Stulz and Williamson (2003)
explore the link between national cultural and international differences in corporate
governance. The authors measure cultural differences by religion and language and show that
cultural differences can explain differences in investor protection for a set of countries with thesame legal systems. For example, compared to Protestant countries, Catholic countries provide
much weaker protection for creditors.
The Japanese culture provides an excellent setting for studying the impact of culture on
corporate outcomes. By most measures, the Japanese culture has unique features which can be
attributed, inter alia, to the historical and geographical seclusion of Japan prior to recent times.
7

Figure 2 provides a quick comparison of Hofstede cultural measures between Japan and the US,
the latter providing the basis and data for most of corporate governance literature to date.
As Figure 2 shows, the Japanese culture score very highly on Power Distance (the extent towhich the less powerful members of organizations and institutions accept and expect that power
is distributed unequally), Masculinity (preference in society for achievement, heroism,
assertiveness and material rewards for success), Uncertainty Avoidance (society’s tolerance for
ambiguity, the extent to which people embrace or avert an event of something unexpected,
unknown, or away from the status quo), and Long-term Orientation (viewing adaptation andcircumstantial, pragmatic problem-solving as a necessity).
~ Figures 2 about here ~World Values Survey also supports our argument on the Japanese culture. Their fourth survey(WVS Wave 4) asks the following: ‘People have different ideas about following instructions atwork. Some say that one should follow one's superior's instructions even when one does not
fully agree with them. Others say that one should follow one's superior's instructions only when
one is convinced that they are right.’ Only 9.2% of the 1362 Japanese respondents answer theymust be convinced first. The average across all countries is 43.9%, and the ratio is at least 20%
in any other country but Japan. Ahern et al. (2015) use the answer to this question to measure
the degree of hierarchical culture.
Other studies on Japanese social behaviour (for example Benedict, 1946, Caudill and Scarr,
1962) have similarly emphasized the importance of 1) Conformity, 2) Group membership, and
3) Respect for authority in the Japanese culture. We will use these constructs in the rest of thepaper to argue why smaller and younger Japanese companies have the tendency to comply with
their leaders, and at a higher level, with government authority.

3. Research Design
3.1. Hypothesis Development
Our first two hypotheses are concerned with board composition and independence. The Codeclearly stipulates the requirement to have at least two outside directors on the board. In theJapanese context where a majority of companies did not have any or had only one outside8

director prior to the introduction of the Code, this can only mean that we should expect theboard size, and the number/ratio of outside directors to increase following the introduction of
the Code. 5 Of course, a voluntary code, by its very nature, may mean that a majority ofcompanies may not choose to comply with it. However, given the Japanese institutional context
and conformity pressures, we do not expect this to be the case ex ante.
Hypothesis 1: The voluntary Code increases board size.
Hypothesis 2: Number and ratio of outside directors increases following adoption of the Code.
As we expect the voluntary nature of the Code to lead to overcompliance, we should also
observe a decline in firm value when the firm appoints outside directors in response to theintroduction of the code. Any such decision by the firm is, by nature, a knee-jerk reaction to aregulatory change and not driven by company fundamentals. As such, it is not likely to increase
shareholder value. In particular, this negative effect should be large among non-T1 firms
because foreign investors, who care more about the quality of corporate governance relative toother investors, invest in such firms to a much lesser extent. Therefore, strictly speaking andapart from the cultural pressures, there is no good reason for these firms to comply with theCode en masse. Therefore:
Hypothesis 3: Firm value decreases following overcompliance to the Code.
In the next section, we lay out the empirical strategy for testing these hypotheses.
3.2. Empirical Design
Unlike general studies on voluntary disclosure that often face the problem of endogeneity,studies on regulatory settings can use changes in disclosure regulation as an exogenous shock
to corporate information environment to avoid self-selection issues (e.g., Atanasov and Black,2016). However, the regulatory approach faces challenges as new rules often arrive withchanges in institutional settings, following an economic crisis or a major corporate scandal. For
instance, the Asian crisis of 1997 was followed by introduction of a corporate governance codein Asian countries, namely, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South

5

Board size can stay constant if firms replace insiders with outsiders. We will empirically investigate this point in
Section 5.2.

9

Korea, Taiwan and Thailand (Nowland 2008). Having said that, we have no good reason tosuspect similarly significant or systemic changes in the institutional settings of the Japanese
corporate sector during the past few years prior to the introduction of the Code.
We use an Instrumental Variable (IV) approach in our empirical design. An IV approach canidentify the Local Average Treatment Effect, i.e., the treatment effect for the subset of thesample that takes the treatment. This allows us to examine the link between appointment ofoutside directors, induced by the introduction of the code, and firm value. We first identify theeffect of outside directors through a change in the introduction of the code and then regress
Tobin’s Q on the number/ratio of outsider directors in an IV setting.
Our instrument reflects policy pressure from the introduction of the code. To construct the
instrument, we use two variables. The first is a treatment variable which takes the value of one
if the number of the firm’s outside directors is less than zero or one prior to the reform. We use
one of the following three dummy variables that takes one if: i) the firm had no outside directors;ii) the firm had no outside directors and takes a missing value if the firm had one outside
director; or iii) the firm had less than two outside directors. The second is a dummy variable
that takes the value of one after the reform.
We choose March 2015 as the timing of the effective introduction of the code. Firms with fiscal
year ending in March generally have their annual shareholder meeting in June, and this is thesame timing as the implementation of the Code. The instrument is the intersection of the firstand second variables. We thus employ three instruments to fully ensure the robustness of ourfindings. These instruments exhibit a cross-sectional variation, either zero or one, only after theeffective introduction of the code. Given the prior observation that the code affected both T12
and non-T12 firms, we do not interact a T12 dummy with this instrument. We then estimate theparameters of the following two equations:"#$%&'()*+ = -* + /0 1'(2$* ∗ 45$('+ + 67*+ + 8+ + 9*+ ,(1)> *+ + 6 ; 7*+ + 8+; + 9*+; ,:*+ = -*; + /< "#$%='()

(2)

10

where indexes i and t respectively indicate firm and fiscal year, "#$%&'()*+ is the number/ratioof outsider directors, 1'(2$* is one if the firm is in the treatment group, 45$('+ is one if after> *+ is the fitted value
the reform, 7*+ includes control variables, :*+ is the Tobin’s Q, "#$%='()of "#$%&'()*+ from regression (1), 8+ is year dummies, -* is firm-fixed effects, and 9*+ iserror terms. Standard errors are clustered at the firm level. We use the two stage least squares
for estimation.
3.3. Data
We use data provided by Nikkei NEEDS FinancialQUEST and Executive Data respectively
covering basic financial and governance information of Japanese public firms. The sample runs
from 2010 to 2017 and we keep firms whose end of fiscal year is in March, which account forover 70% of Japanese firms. The sample includes those listed on the first section (T1) of theTSE, on the second section (T2), other sections of the TSE and finally those listed in otherJapanese exchanges apart from the TSE such as Nagoya, Fukuoka, or Sapporo Stock
Exchanges. We evaluate the section where the firm lists its stock as of 2014 when performing
subsample analyses to use a within-firm variation across same firms. We winsorize the variablesat the 1% level.
Table 1 shows the summary statistics, and Table 11 shows all variable definitions. The sample
size of 14915 is considerably larger than that in many other countries with comply-or-explain
rules: for example, it is 122 in Germany (Goncharov, Werner and Zimmermann, 2006); 57 inSpain (Fernández-Rodríguez, Gómez-Ansón and Cuervo-García, 2004); and 518 in Mexico(Price, Román, and Rountree, 2011). This large sample size enables various subsample analyses
to understand the effect of such regulations better. The average firm in our sample has 1.6
outside directors which corresponds with a 18% ratio of outside directors to board size. It isalso shown that the average firm in our sample is 367 billion JPY in size and about 51% levered.
~ Table 1 about here ~4. Empirical Findings
4.1. Baseline Results
Table 2 presents the first stage estimation results. The results unambiguously show that
following the introduction of the Code, both the number of outside directors and their
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proportion in the board has increased significantly among the treated firms - at the 1% level inall specifications. In particular, Panels D and E show that non-T12 firms have also increased
the number/ratio of outside directors. The magnitudes of the coefficient on 1'(2$* ∗ 45$('+are broadly comparable across firms in different sections. This finding suggests that the Codeaffected both target and non-target firms’ board composition as suggested in Figure 1.
~ Table 2 about here ~Next, we investigate the negative impact the rise in outside directors has on firm value, withresults reported in Panel A of Table 3. Each column reports the second stage estimation resultthat corresponds to the first stage estimation in Table 2. For example, column (1) of Table 3
uses 1'(2$0* ∗ 45$('+ as the instrument. We observe the negative impact at the 1% level inall specifications. The findings are economically significant. A change in outside directors fromzero to two and one to two respectively reduces firm value by 78.5 billion and 31.2 billion Yen
from columns (1) and (3) of Panel A. Bearing in mind Fauver et al. (2017)’s finding that
introducing a comply or explain increases firm value by 0.18 of Tobin’s Q, our results suggestthat the negative cultural pressure in Japan is large enough to reverse the sign of the effect.
Standard deviation of Tobin’s Q is three times larger in Fauver et al. (2017) than in our paper.
Considering this difference makes the negative economic significance of our paper even larger
relative to their results. Among other variables, we notice that foreign ownership has asignificant and positive impact on Tobin’s Q.
~ Table 3 about here ~These results are consistent with the empirical evidence in support of smaller boards (see, forexample, Yermack, 1996) and may highlight the underlying problems of larger boards such as
poor communication and ineffective decision making. In addition, we argue that any change inboard composition in response to regulatory requirements is, by nature, a reactionary moverather than a proactive and organic decision made by the management for the sole benefit of
the firm. Another possibility is that it is not clear to the market whether companies judge thatthey should comply with the Code or respond to conformity pressure.
4.2. Board Independence and Firm Value in Different Market Sections
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Now we turn our attention to the different market sections present in the sample. Panels B to E
of Table 3 shows these effects clustered by market section. While we notice a reduction in firm
value across the board, this reduction is not statistically significant among T2 firms. Among
non-T2 TSE firms, the negative effect is generally larger when we define the treated firms withno outside directors prior to the reform (i.e., specifications 1, 2, 4, and 5). In contrast, among
non-TSE firms, firm value declines significantly when the number rises from one to two (i.e.,
specifications 3 and 6). This suggests that appointing two outside directors, under cultural
influences we describe in this paper, has a markedly negative impact on these firms.
We provide further support for our hypothesis, exploiting differences between T1 and non-T1
firms. Most firms in the T1 section are industry leaders and those in non-T1 section are
relatively small. We expect the former’s decision leads to the latter’s compliance. We construct
an additional instrument: an interaction term of the lagged average compliance rate of T1 firms
in the industry and 1'(2$* ∗ 45$('+ . Table 4 first shows that industry pressure measured bythis variable encourages non-T1 firms’ decision to appoint outside directors. It also reports that
this decision reduces firm value. The magnitude is larger especially among non-T12 TSE firms.
These findings are consistent with our hypothesis of overcompliance among non-T1 firms
following the lead of T1 firms in complying with the code, and this mimicking is detrimental
to firm value.
~ Table 4 about here ~4.3. Firm Attributes, Value and Board Independence
Table 5 shows the effect clustered by firm age. We divide firms into young and mature clusters.
We categorise firms in to these two groups based on comparison with fixed age thresholds (40,45 and 50) suitable for the Japanese context. The findings suggest that value of young firms
declined more than old firms on average (i.e., across all listed firms) in all specifications. Thisis consistent with our general finding that culture-induced governance compliance is mostdamaging to less established firms.
~ Table 5 about here ~13

We also look at the level of R&D investment and divide firms into two groups compared tofirm medians. Results are illustrated in Table 6.
~ Table 6 about here ~Importantly, the reduction in firm value is larger when the firm is more R&D-intensive on
average in Panel A. This finding suggests that the cultural pressure to conform and comply
exerts a particularly large negative effect on firms in their growth phase. In other words, these
are the firms that should not prioritise compliance with the voluntary code and instead should
focus on their investments and attention on their complex growth journeys. Consequently, thefirms which are more R&D intensive are not necessarily better off by recruiting outside
directors in order to comply with the Code. This finding is also in line with Balsmeier, Fleming,and Manso (2017) reporting that outside directors discourage explorative innovation.
Table 6 provides further support for our cultural explanation. We observe the negative effectamong R&D-intensive firms especially among T1 ones. Given that these firms should beindustry leaders even among T1 firms, this finding supports our argument that these leaders
react to the governmental policy due to respect for authority.
4.4. Director Attributes, Value and Board Independence
Prior literature measures the quality of board advice using the connections that a director has
with other firms at any given time. The focus is often on such connections because they arise
when a director has qualities that make them valuable to many firms as CEO directors (see,Coles, Daniel, and Naveen, 2012; Nguyen, Hagendorff and Eshraghi, 2017; Fich 2005).
Table 7 shows the results by director characteristics. We find that this reduction in firm value
is larger when the firm appoints outside directors who are/were not managers of other firms. In
other words, outside directors with more expertise, better information and contacts are a better
investment for the firm, although not, in aggregate, sufficient to counteract the negative impactof overcompliance as previously discussed. On average and particularly for non-T1 firms,
appointing outside directors with past experience or current positions is a better strategy thanappointing non-experienced directors. This negative effect among non-T1 firms also suggests

14that they were less successful in appointing qualified outside directors due to their scarce supply(Masulis and Mobbs, 2014).
~ Table 7 about here ~5. Robustness tests
In this section, we conduct additional analysis to improve the robustness of our findings. First,
we run the main test for firms that were listed on the Osaka Stock Exchange (OSE) and wereforced to move to TSE as a result of a merger of OSE with TSE. In July 2012 a planned merger
with the TSE was approved by the Japan Fair Trade Commission and it was implemented in
the coming year. As a consequence, these firms became directly subject to the Code.
As Table 8 illustrates, the results remain qualitatively similar. We observe this patternespecially among firms in the first or second sections of OSE. This finding suggests that firm
value declines among relatively mature firms that previously listed their stocks on Osaka Stock
Exchange. It is important to note that the listing requirements of OSE and TSE are mainly
similar.
~ Table 8 about here ~We then turn our attention from the number of outside directors to board size, i.e., the total
number of directors. A rise in the number of outside directors can increase board size so thetwo variables may be positively correlated. Alternatively, firms can replace outside directors
with inside directors to hold board size constant.
~ Table 9 about here ~In Table 9, we replace the number of outside directors to that of all directors in equations (1)and (2). This table demonstrates that the Code increases board size on average, which in turnhas a negative impact on Tobin’s Q. This is particularly true for T1 firms.
In addition, we run a placebo test to find the sensitivity of the results to the year the reforms
were introduced. Using eight-year periods in each specification, we have four years both before
15and after the reform. Therefore, we assume that the reforms were implemented in 2008 or 2009
to avoid including periods after the introduction of the Code. As expected, the results in Table
10 do not indicate any significant link between the number of outside directors and firm value.
Further, the instruments do not have explanatory power on the appointment of outside directors.
~ Table 10 about here ~6. Conclusions
Recent corporate governance scandals such as Petrobras in Brazil, Deutsche Bank andVolkswagen in Germany, and Toshiba in Japan continue to drive the debate on the best formof governance to mitigate corporate misconduct and increase firm value. Among the large
family of corporate governance approaches, voluntary codes in the form of comply or explain
have found increasing acceptance across the world. This comes with a challenge, however.
While voluntary approaches can help reduce poor governance, they are less effective inpromoting best governance practices (Haxhi and Aguilera, 2014).
This paper provides empirical evidence on the causal effects of disclosure regulation on market
outcomes – an underexplored area of the literature as discussed in Leuz and Wysocki (2016).
Unlike studies on voluntary disclosure that often face the problem of endogeneity, studies onregulatory settings can use changes in regulation as exogenous shock to the corporate
information environment of the firm to avoid self-selection issues.
Drawing on the recent Japanese experience with voluntary codes of corporate governance, we
identify another area where comply or explain regimes may fail to be effective, or in Japan’scase, have a negative effect. That is when, due to institutional and cultural pressures, a majorityof listed firms choose to comply, although they do not have to, and even though this comes atthe cost of lower shareholder value.
While the concept of national culture may pose definitional and measurement challenges forlarge and diverse nations such as the US or China whose populations consist of many different
ethnicities and immigrant backgrounds, it does not so for Japan. For much of its history, Japanremained uninvaded, and due to the isolationist foreign policy of the Japanese shogunate(known as Sakoku meaning ‘closed country’), relations and trade with other countries were16

severely limited for close to 250 years. This and several other reasons have resulted in a highdegree of ethnic, religious and cultural homogeneity among the Japanese, and importantly forour research purposes, in the Japanese corporate sector and among its senior management.
Although we have not provided a clear channel through which compliance reduces firm value,
we can provide some conjectures. Apart from our finding that the Code has increased board
size, it may have also confused the shareholders. These regulations trust the companies to better
judge whether they should or should not comply with the corporate governance principles statedin the code. However, it is not clear to the market whether their compliance is driven bycorporate fundamentals or a knee-jerk reaction to a regulatory change. Future research in thisarea can usefully shed light on the nexus between national culture and institutional settings.

17

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20

Figure 1. Changes in Board Composition, Board Size and Compliance Rate
These figures show the change in the board composition, board size and compliance rate among all firms, firms that list their stocks on the firstsection of the Tokyo Stock Exchange (TSE-1st firms), TSE-2nd, TSE-other, and non-TSE firms between 2003 and 2017.
Figure 1A. Number of Outside Directors
3

2

1

0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

All

TSE-1stTSE-2nd21

TSE-other

Non-TSEFigure 1B. Percentage of Outside Directors
30%

20%

10%

0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

All

TSE-1stTSE-2nd22

TSE-other

Non-TSEFigure 1C. Compliance Rate
100%

80%

60%

40%

20%

0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

All

TSE-1stTSE-2nd23

TSE-other

Non-TSEFigure 1D. Number of Total Directors
11

10

9

8

7

6
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

All

TSE-1stTSE-2nd24

TSE-other

Non-TSEFigure 2. Cultural Comparison between Japan and the US
This figure provides a comparison of the six cultural measures of Hofstede between Japan and the United States.

100

50

0
Power DistanceIndividualism

Masculinity

Uncertainty Avoidance Long Term Orientati on

Japan

25

U.S.

Indul genceTable 1. Summary Statistics
This table reports summary statistics for the entire sample from 2010 to 2017.
Panel A. All firms
Tobin’s Q
Number of outside directors
Percentage of outside directors
Number of total directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership (%)
Audit & supervisory committee
Firm age

Mean
1.075
1.560
18.434
8.446
0.292
0.511
0.014
0.013
0.063
11.0230.182
11.50619.3850.088
58.968

26

SD
0.537
1.288
14.549
2.974
0.183
0.207
0.021
0.015
0.048
1.659
0.260
11.94712.4520.284
23.960Min Median
Max
0.436
0.944
5.488
0.000
1.000
6.000
0.000 16.667 62.500
3.000
8.000
19.000
0.005
0.273
0.855
0.098
0.507
1.151
0.000
0.005
0.112
0.000
0.008
0.111
-0.141 0.060
0.260
7.378 10.822 15.662
0.000
0.000
1.175
0.000
7.335
50.147
0.036 17.614 50.584
0.000
0.000
1.000
3.000 62.000 121.000

Obs.
14915
14915
14915
14915
14915
14915
14915
14915
14915
14915
14915
14915
14915
14915
14915

Panel B. TSE 1st section
Tobin’s Q
Number of outside directors
Percentage of outside directors
Number of total directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership (%)
Audit & supervisory committee
Firm age

Mean
1.099
1.758
19.526
9.124
0.298
0.517
0.016
0.014
0.068
11.781
0.221
15.63824.5930.082
62.454

27

SD
0.502
1.316
14.288
2.989
0.182
0.201
0.022
0.016
0.044
1.483
0.277
12.05411.3460.275
24.374Min Median
Max
0.436
0.972
5.488
0.000
2.000
6.000
0.000 20.000 62.500
3.000
9.000
19.000
0.005
0.275
0.855
0.098
0.511
1.151
0.000
0.007
0.112
0.000
0.010
0.111
-0.141 0.064
0.260
7.378 11.567 15.662
0.000
0.079
1.175
0.000 13.162 50.147
0.055 24.153 50.584
0.000
0.000
1.000
3.000 65.000 121.000

Obs.
9504
9504
9504
9504
9504
9504
9504
9504
9504
9504
9504
9504
9504
9504
9504

Panel C. TSE 2nd section
Tobin’s Q
Number of outside directors
Percentage of outside directors
Number of total directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership (%)
Audit & supervisory committee
Firm age

Mean
0.919
1.283
16.756
7.664
0.309
0.510
0.009
0.009
0.054
9.914
0.105
3.938
11.8830.106
62.902

28

SD
0.418
1.141
14.142
2.574
0.178
0.199
0.013
0.011
0.047
0.797
0.181
7.159
8.628
0.308
19.462Min Median
Max
0.436
0.834
5.488
0.000
1.000
6.000
0.000 16.667 60.000
3.000
7.000
19.000
0.005
0.293
0.855
0.101
0.507
1.151
0.000
0.004
0.096
0.000
0.007
0.111
-0.141 0.051
0.260
7.378
9.931
13.369
0.000
0.000
0.997
0.000
0.969
49.8910.036 10.289 50.584
0.000
0.000
1.000
3.000 65.000 121.000

Obs.
2247
2247
2247
2247
2247
2247
2247
2247
2247
2247
2247
2247
2247
2247
2247

Panel D. TSE other sections
Tobin’s Q
Number of outside directors
Percentage of outside directors
Number of total directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership (%)
Audit & supervisory committee
Firm age

Mean
1.151
1.128
16.429
6.706
0.249
0.488
0.012
0.012
0.058
9.442
0.132
4.757
7.818
0.091
44.229

29

SD
0.703
1.139
15.410
2.233
0.185
0.224
0.022
0.016
0.060
1.002
0.244
7.943
6.799
0.288
19.977

Min Median
Max
0.436
0.920
5.488
0.000
1.000
6.000
0.000 14.286 62.500
3.000
6.000
18.000
0.005
0.227
0.855
0.098
0.491
1.151
0.000
0.001
0.112
0.000
0.007
0.111
-0.141 0.055
0.260
7.378
9.451
13.251
0.000
0.000
1.175
0.000
1.244
50.1470.036
6.142
44.155
0.000
0.000
1.000
3.000 45.000 118.000

Obs.
2743
2743
2743
2743
2743
2743
2743
2743
2743
2743
2743
2743
2743
2743
2743

Panel E. Non-TSETobin’s Q
Number of outside directors
Percentage of outside directors
Number of total directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership (%)
Audit & supervisory committee
Firm age

Mean
0.873
1.359
15.800
8.641
0.334
0.544
0.003
0.007
0.053
10.1240.052
2.567
17.2340.114
55.316

30

SD
0.409
1.297
14.224
3.234
0.164
0.244
0.006
0.009
0.039
1.167
0.128
4.912
10.0170.318
22.874Min Median
Max
0.436
0.799
3.995
0.000
1.000
6.000
0.000 15.385 62.500
3.000
8.000
19.000
0.006
0.323
0.855
0.098
0.523
1.151
0.000
0.000
0.033
0.000
0.005
0.111
-0.137 0.049
0.236
7.378 10.358 12.823
0.000
0.000
0.945
0.000
0.217
28.2250.036 17.394 36.153
0.000
0.000
1.000
3.000 62.000 111.000

Obs.
421
421
421
421
421
421
421
421
421
421
421
421
421
421
421

Table 2. Change in Number and Percentage of Outside Directors
This table illustrates the change in the number and ratio of outside directors following theJapan’s corporate governance reform.
Panel A. All firms
Treat0*After
Treat0d*After
Treat1*After
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
F of the excluded instruments
Observations

Number of outside directors
(1)
(2)
(3)
0.437***(0.033)0.755***(0.046)
0.612***(0.041)
0.123-0.0940.049(0.182)(0.238)(0.175)-0.195*-0.094-0.171*(0.103)(0.141)(0.100)-0.508-0.087-1.197(1.590)(1.910)(1.550)1.144
1.497*
1.123*(0.717)(0.902)(0.681)-0.299-0.330-0.152(0.221)(0.299)(0.217)0.151**
0.161*
0.128**(0.067)(0.089)(0.065)-0.021
0.024
0.001(0.097)(0.119)(0.090)0.013*** 0.012*** 0.013***(0.003)(0.004)(0.003)
0.001

0.002

0.001

Percentage of outside directors
(4)
(5)
(6)
7.950***(0.431)12.507***(0.566)9.702***(0.487)-1.590-3.461-2.787(2.433)(3.000)(2.324)-1.1600.324-0.784(1.424)(1.936)(1.399)18.26425.246
8.360(21.628)(25.913)(21.336)
8.934
16.2557.277(9.154)(10.890)(8.746)-3.981-4.181-1.237(2.985)(3.767)(2.940)-0.270-0.581-0.732(0.941)(1.214)(0.916)-0.1420.606
0.167(1.398)(1.638)(1.301)0.132***
0.116**
0.122***(0.035)(0.048)(0.032)-0.008(0.003)(0.003)(0.003)(0.033)1.372*** 1.269*** 1.344*** 10.675***(0.041)(0.055)(0.040)(0.515)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
175.43270.93223.02
339
14915
8937
14915
14915

31

-0.022-0.009(0.043)9.880***(0.692)
Yes
Yes
486.118937(0.033)10.385***(0.501)
Yes
Yes
395.9214915

Panel B. TSE 1st sectionTreat0*After
Treat0d*After
Treat1*After
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
F of the excluded instruments
Observations

Number of outside directors
Percentage of outside directors
(1)
(2)
(3)
(4)
(5)
(6)
0.546***
8.804***(0.042)(0.534)0.861***
13.154***(0.054)(0.645)0.646***
9.444***(0.045)(0.519)0.421*
0.033
0.367
2.529
-0.7041.852(0.248)(0.331)(0.237)(3.259)(3.990)(3.097)-0.303-0.314** -3.718**-2.719-2.706
0.383***(0.141)(0.194)(0.135)(1.855)(2.420)(1.743)
1.835
2.173
0.612
50.241**51.585*32.713(1.723)(1.993)(1.710)(22.966)(27.717)(23.403)
0.995
1.687*
1.046
13.13223.173**13.172(0.759)(0.934)(0.717)(9.894)(10.999)(9.314)-0.322-0.322-0.150-2.897-3.924-0.188(0.299)(0.400)(0.298)(3.998)(5.342)(3.954)0.348*** 0.359*** 0.279***
1.919
0.806
0.858
(0.094)(0.130)(0.091)(1.253)(1.703)(1.172)-0.098-0.015-0.083-0.9710.164-0.797(0.108)(0.131)(0.103)(1.558)(1.904)(1.512)
0.004
0.003
0.003
0.045
0.034
0.032
(0.004)(0.005)(0.003)(0.039)(0.050)(0.036)-0.003(0.003)
1.329***(0.054)
Yes
Yes
171.339504

0.000-0.051-0.046-0.050(0.004)(0.003)(0.039)1.222*** 1.296*** 9.418***(0.080)(0.053)(0.661)
Yes
Yes
Yes
Yes
Yes
Yes
254.21205.24271.23
5485
9504
9504

(0.056)8.161***(0.957)
Yes
Yes
414.295485(0.038)9.060***(0.644)
Yes
Yes
330.079504

32-0.003

Panel C. TSE 2nd sectionTreat0*After
Treat0d*After
Treat1*After
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
F of the excluded instruments
Observations

Number of outside directors
Percentage of outside directors
(1)
(2)
(3)
(4)
(5)
(6)
0.562***
9.151***(0.076)(0.995)1.065***
15.537***(0.126)(1.573)0.845***
12.136***(0.125)(1.510)-0.341-0.132-0.355-6.801-2.428-7.358(0.464)(0.606)(0.415)(5.851)(7.182)(5.310)
0.134
0.089
0.138
3.381
2.425
3.449
(0.200)(0.251)(0.186)(2.714)(3.365)(2.569)-1.484-0.898-1.889-38.282-30.903-41.692(4.952)(7.163)(4.803) (87.408) (87.921)(80.284)-0.528-2.283-1.064-10.665-34.216-20.993(2.483)(3.112)(2.172) (24.751) (31.492)(22.830)
0.117-0.5430.260
2.645-2.5385.413(0.580)(0.754)(0.550)(6.820)(9.036)(6.731)-0.0330.053-0.017-2.4110.241-2.200(0.164)(0.193)(0.176)(2.597)(3.224)(2.812)
0.214
0.101
0.289
6.095
2.290
7.254*(0.326)(0.357)(0.289)(4.281)(4.010)(3.732)
0.008
0.007
0.010
0.056
-0.0760.087(0.008)(0.013)(0.008)(0.096)(0.154)(0.096)-0.009-0.005-0.069-0.056-0.076(0.006)(0.006)(0.006)(0.081)
1.108*** 0.891*** 1.087*** 8.121***(0.085)(0.084)(0.076)(0.973)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
54.44
70.05
45.45
83.69
2247
1392
2247
2247

(0.083)
6.848***(1.037)
Yes
Yes
95.82
1392

(0.083)7.966***(0.922)
Yes
Yes
63.91
2247

33

-0.009Panel D. TSE other sections

Treat0*After
Treat0d*After
Treat1*After
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
F of the excluded instruments
Observations

Number of outside directors
(1)
(2)
(3)
0.489***(0.074)0.920***(0.139)0.793***(0.135)0.137-0.2220.022(0.282)(0.371)(0.297)0.012
0.179-0.057(0.171)(0.248)(0.176)-3.734-2.710-2.134(2.594)(3.245)(2.322)
1.263
0.435
0.851
(1.783)(2.206)(1.713)-0.3430.082-0.157(0.355)(0.474)(0.345)-0.021-0.0060.001(0.092)(0.135)(0.098)-0.324*-0.193-0.227(0.187)(0.232)(0.174)0.016**
0.013
0.016***(0.006)(0.008)(0.006)0.014**

0.009

0.015**

Percentage of outside directors
(4)
(5)
(6)
8.247***(1.135)15.348***(1.928)13.275***(1.807)-4.892-7.492-6.823(4.572)(5.949)(4.699)
1.314
4.512
0.156
(2.883)(4.363)(3.010)-45.074-20.861-18.262(41.560)(46.972)(39.731)-3.355-4.100-10.300(23.346)(29.852)(22.632)-6.927-1.660-3.790(5.679)(6.531)(5.644)-1.567-1.680-1.214(1.469)(2.050)(1.588)-5.656*-3.154-4.017(2.938)(2.917)(2.590)0.212**
0.186
0.208***(0.087)(0.113)(0.075)
0.129

0.054

0.136

(0.006)(0.007)(0.006)(0.091)(0.096)(0.083)
1.692*** 1.649*** 1.681*** 16.157*** 16.054*** 15.975***(0.093)(0.100)(0.089)(1.357)(1.631)(1.333)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
43.24
43.17
34.41
52.33
62.46
53.51
2743
1757
2743
2743
1757
2743

34

Panel E. Non-TSETreat0*After
Treat0d*After
Treat1*After
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
F of the excluded instruments
Observations

Number of outside directors
(1)
(2)
(3)
0.540***(0.140)0.899***(0.165)0.736***(0.151)-1.308** -1.694** -1.440**(0.639)(0.830)(0.576)
0.602
0.696
0.691
(0.518)(0.549)(0.429)-33.300-3.541-26.878(24.618) (35.282) (28.127)-0.308-2.695-0.345(4.046)(6.362)(4.018)
2.037
2.000
2.590
(1.865)(1.909)(1.669)-0.1850.049-0.188(0.146)(0.109)(0.194)0.191-0.060-0.008(0.551)(0.462)(0.531)
0.018
0.001
0.016
(0.022)(0.025)(0.022)

Percentage of outside directors
(4)
(5)
(6)
7.576***(1.699)11.994***(1.927)
10.100***(1.989)-8.530-15.509-10.271(9.551)(12.474)(8.720)9.881
11.49511.072(8.162)(10.171)(7.924)-334.820-198.592-249.278(293.540) (473.261) (340.700)-16.061-85.088-16.577(65.975) (132.577) (64.939)-22.644-16.318-15.152(27.686)(27.785)(24.360)-6.735**-2.565*-6.782*(2.768)(1.422)(3.601)-0.442-2.638-3.306(6.193)(5.667)(5.783)0.174-0.1220.135(0.234)(0.168)(0.223)-0.006-0.022-0.0150.002-0.0720.086(0.016)(0.024)(0.020)(0.189)(0.149)(0.158)1.741*** 1.538*** 1.729*** 15.642*** 14.576*** 15.529***(0.180)(0.202)(0.162)(2.150)(2.382)(2.015)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
13.98
27.41
22.43
18.72
35.61
24.28
421
303
421
421
303
421

35

Table 3. Impact of Reforms on Firm Value
This table reports the impact of the rise in number and ratio of outside directors in firm value.
Specifications 1 and 4 use Treat0*After, specifications 2 and 5 use Treat0d*After, andspecifications 3 and 6 use Treat1*After instrument, respectively.
Panel A. All firms
Number of outside directors
Percentage of outside directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
Observations

Tobin’s Q
(1)
(2)
(3)
(4)
(5)
(6)
-0.107*** -0.097*** -0.085***(0.035)(0.028)(0.031)-0.006*** -0.006*** -0.005***(0.002)(0.002)(0.002)-0.620*** -0.582*** -0.623*** -0.643*** -0.593*** -0.642***(0.096)(0.121)(0.096)(0.097)(0.123)(0.097)0.412*** 0.277*** 0.416*** 0.426*** 0.288*** 0.426***(0.083)(0.102)(0.084)(0.084)(0.103)(0.084)-1.312*-1.619*-1.311*-1.150-1.463-1.164(0.777)(0.877)(0.775)(0.778)(0.893)(0.772)4.658*** 4.471*** 4.645*** 4.588*** 4.421*** 4.589***(0.541)(0.726)(0.540)(0.537)(0.722)(0.537)
1.170*** 1.166*** 1.173*** 1.179*** 1.174*** 1.179***(0.175)(0.222)(0.174)(0.175)(0.222)(0.175)-0.008-0.012-0.010-0.025-0.031-0.025(0.062)(0.084)(0.062)(0.063)(0.085)(0.063)
0.050
0.047
0.051
0.051
0.048
0.052
(0.052)(0.072)(0.052)(0.052)(0.072)(0.052)0.010*** 0.008*** 0.010*** 0.009*** 0.007*** 0.009***(0.001)(0.002)(0.001)(0.001)(0.002)(0.001)0.017***

0.017***

0.017***

0.017***

0.017***

0.017***(0.002)0.168***(0.055)
Yes
Yes
14915

(0.002)0.152***(0.049)
Yes
Yes
8937

(0.002)0.136***(0.049)
Yes
Yes
14915

(0.002)0.084***(0.030)
Yes
Yes
14915

(0.002)0.087**(0.034)
Yes
Yes
8937

(0.002)0.078**(0.030)
Yes
Yes
14915

36

Panel B. TSE 1st section
Number of outside directors
Percentage of outside directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
Observations

Tobin’s Q
(1)
(2)
(3)
(4)
(5)
(6)
-0.079** -0.076*** -0.069**(0.036)(0.026)(0.029)-0.005** -0.005*** -0.005**(0.002)(0.002)(0.002)-0.733*** -0.750*** -0.738*** -0.754*** -0.756*** -0.755***(0.128)(0.164)(0.129)(0.130)(0.168)(0.131)0.214**
0.093
0.218**
0.226**
0.103
0.227**(0.090)(0.129)(0.091)(0.090)(0.129)(0.091)-2.194** -2.662*** -2.216**-2.093** -2.571*** -2.105**(0.899)(0.985)(0.891)(0.904)(0.993)(0.892)4.780*** 4.590*** 4.775*** 4.766*** 4.578*** 4.765***(0.622)(0.847)(0.623)(0.618)(0.844)(0.619)1.332*** 1.180*** 1.334*** 1.343*** 1.185*** 1.343***(0.238)(0.331)(0.238)(0.238)(0.331)(0.238)0.169***
0.110
0.165*** 0.151***0.087
0.150***(0.059)(0.075)(0.058)(0.058)(0.076)(0.058)0.117**
0.161***
0.118**
0.120**
0.163***
0.120**(0.047)(0.060)(0.047)(0.048)(0.061)(0.048)0.009*** 0.008*** 0.009*** 0.009*** 0.008*** 0.009***(0.002)(0.002)(0.002)(0.002)(0.002)(0.002)0.014***

0.015***

0.014***

0.014***

0.015***

0.014***(0.002)0.122**(0.053)
Yes
Yes
9504

(0.003)0.123***(0.047)
Yes
Yes
5485

(0.002)0.106**(0.045)
Yes
Yes
9504

(0.002)
0.063**(0.031)
Yes
Yes
9504

(0.003)0.071**(0.036)
Yes
Yes
5485

(0.002)0.060**(0.030)
Yes
Yes
9504

37

Panel C. TSE 2nd section
Number of outside directors-0.279*(0.164)0.522***(0.100)1.069(1.400)2.642**(1.146)0.922***(0.257)-0.213***(0.066)0.022(0.103)0.011***(0.003)-0.160(0.166)0.445***(0.107)
3.531(2.579)3.628**(1.737)0.908***(0.268)-0.157*(0.092)-0.066(0.136)0.012**(0.006)

Tobin’s Q(3)(4)-0.077(0.051)-0.001(0.003)-0.310*-0.280*(0.169)(0.165)0.531*** 0.524***(0.100)(0.101)1.056
1.053(1.489)(1.390)2.530**
2.640**(1.126)(1.147)0.950*** 0.923***(0.271)(0.257)-0.215*** -0.215***(0.064)(0.065)0.038
0.025(0.114)(0.101)0.011*** 0.011***(0.004)(0.003)0.018***

0.018***

0.018***

0.018***

0.018***

0.018***(0.004)0.010(0.046)
Yes
Yes
2247

(0.005)0.056(0.049)
Yes
Yes
1392

(0.004)0.080(0.061)
Yes
Yes
2247

(0.004)-0.001(0.027)
Yes
Yes
2247

(0.005)0.033(0.038)
Yes
Yes
1392

(0.004)0.039(0.037)
Yes
Yes
2247

(1)
-0.018(0.042)(2)-0.055(0.041)

Percentage of outside directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
Observations

38

(5)

(6)

-0.004(0.003)-0.162(0.163)0.449***(0.111)
3.464(2.584)3.625**(1.735)0.928***(0.271)-0.159*(0.089)-0.063(0.131)0.012*(0.006)-0.005(0.004)-0.322*(0.173)0.539***(0.103)0.978(1.469)2.500**(1.116)
0.959***(0.273)-0.226***(0.061)
0.054(0.111)0.011***(0.003)

Panel D. TSE other sections

Number of outside directors-0.459*(0.236)
0.667***(0.203)-0.002(2.109)5.810***(1.490)0.806**(0.364)-0.278*(0.148)-0.152(0.196)0.014**(0.005)-0.443*(0.265)0.599**(0.241)-0.275(2.843)5.256***(1.881)
1.061**(0.432)-0.248(0.195)-0.215(0.286)0.008(0.006)

Tobin’s Q(3)(4)-0.256**(0.124)-0.021***(0.007)-0.461** -0.613***(0.227)(0.236)
0.667*** 0.691***(0.199)(0.205)0.342
0.381(2.078)(2.188)5.724*** 5.282***(1.413)(1.444)0.821**
0.781**(0.352)(0.371)-0.269*-0.304**(0.147)(0.150)-0.123-0.156(0.192)(0.189)0.012**
0.012**(0.005)(0.005)0.032***

0.029***

0.031***

0.030***

0.027***

0.029***(0.006)
0.686***(0.227)
Yes
Yes
2743

(0.007)0.527**(0.238)
Yes
Yes
1757

(0.006)
0.502**(0.236)
Yes
Yes
2743

(0.006)
0.421***(0.149)
Yes
Yes
2743

(0.007)0.333**(0.166)
Yes
Yes
1757

(0.006)
0.316**(0.151)
Yes
Yes
2743

(1)
-0.361***(0.117)(2)-0.282**(0.115)Percentage of outside directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
Observations

39

(5)

(6)

-0.017**(0.007)-0.508*(0.268)0.625**(0.250)0.136(3.003)
5.065***(1.865)1.010**(0.444)-0.275(0.199)-0.214(0.272)0.007(0.006)-0.015**(0.007)-0.571***(0.220)0.684***(0.200)0.609(2.122)
5.348***(1.406)0.803**(0.358)-0.288*(0.150)-0.127(0.186)0.011**(0.005)Panel E. Non-TSE
Number of outside directors(1)-0.081(0.075)(2)-0.121*(0.067)

Percentage of outside directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership (%)
Financial institution ownership(%)
Audit & supervisory committee
Firm fixed effects
Year fixed effects
Observations

Tobin’s Q(3)(4)-0.203**(0.098)-0.006(0.006)-1.304*** -1.116**(0.499)(0.446)
0.511*
0.462(0.270)(0.311)
2.955
8.777(6.295)(5.725)2.555
2.532(2.162)(2.209)2.791*** 2.281***(0.900)(0.720)0.345**
0.344***(0.148)(0.126)-0.212-0.202(0.143)(0.168)0.008
0.005(0.011)(0.010)(5)(6)-0.009*(0.005)-1.555***(0.539)0.550(0.348)15.178**(7.559)3.503(3.252)2.180***(0.793)0.522***(0.077)-0.047(0.186)-0.007(0.010)-0.015**(0.007)-1.164**(0.491)0.535*(0.323)4.718(5.698)2.379(2.194)2.042***(0.634)0.283*(0.170)-0.259(0.189)0.007(0.010)-1.173***(0.454)0.454(0.292)8.015(5.754)2.599(2.222)2.576***(0.882)0.368***(0.127)-0.184(0.147)0.005(0.010)-1.619***(0.538)0.530*(0.313)
16.555**(8.117)
3.949(3.178)2.571***(0.940)0.551***(0.088)-0.031(0.173)-0.006(0.011)0.024**

0.026

0.023*

0.025**

0.028

0.024*(0.012)0.177(0.147)
Yes
Yes
421

(0.018)0.208(0.130)
Yes
Yes
303

(0.013)0.409**(0.186)
Yes
Yes
421

(0.012)0.126(0.111)
Yes
Yes
421

(0.018)0.154(0.103)
Yes
Yes
303

(0.013)0.288**(0.133)
Yes
Yes
421

40

Table 4. Industry Instrument
We calculate the compliance rate of firms on the TSE 1st section and use the lagged variable
as an additional instrument. Results suggest that firms in a particular industry comply with theirindustry leaders listed on the 1st section of TSE. Specifications 1 and 4 use Treat0*After,
specifications 2 and 5 use Treat0d*After and specifications 3 and 6 use Treat1*After
instrument, respectively.
Panel A. All but the TSE 1st section and the TSE 2nd section
Tobin’s Q
All but the TSE-1st
TSE-2nd
(1)
(2)
(3)
(4)
(5)
(6)
Number of outside directors-0.167*** -0.158*** -0.159**-0.019-0.041-0.058(0.054)(0.058)(0.067)(0.041)(0.035)(0.043)
Other control variables
Yes
Yes
Yes
Yes
Yes
Yes
Firm fixed effects
Yes
Yes
Yes
Yes
Yes
Yes
Year fixed effects
Yes
Yes
Yes
Yes
Yes
Yes
First stage F-value
49.83
52.38
37.49
26.84
31.91
20.06
Observations
5557
3512
5557
2184
1352
2184

First stage: Number of outside directors
Treat*After
0.464*** 0.697*** 0.570*** 0.522*** 0.828*** 0.624***(0.063)(0.099)(0.095)(0.092)(0.128)(0.127)
Treat*After*TSE 1st
0.092
0.401*** 0.325***
0.052
0.310*** 0.269**
compliance
(0.078)(0.115)(0.102)(0.102)(0.118)(0.112)
Panel B. TSE other sections and non-TSE


Number of outside directors
Other control variables
Firm fixed effects
Year fixed effects
First stage F-value
Observations
Treat*After
Treat*After*TSE 1stcomplianceTobin’s Q
TSE-other
Non-TSE
(1)
(2)
(3)
(4)
(5)
(6)
-0.334*** -0.257** -0.236*-0.024-0.084-0.170(0.109)(0.110)(0.122)(0.082)(0.081) (0.122)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
23.69
22.09
16.82
7.08
11.35
9.28
2660
1714
2660
410
294
410
First stage: Number of outside directors
0.395*** 0.543*** 0.508*** 0.543*** 0.697*** 0.500**(0.090)(0.163)(0.154)(0.186)(0.241) (0.197)
0.177

0.609***

0.439**-0.028

0.294

0.301

(0.119)(0.201)(0.181)(0.251)(0.333)(0.267)41

Table 5. Firm AgeThis Table illustrates the impact of corporate governance reforms on firm value clustered byage. Young and Mature are defined in relation fixed thresholds (40, 45, 50) suitable for theJapanese context. Specifications 1 and 2 use Treat0*After, specifications 3 and 4 use
Treat0d*After and specifications 5 and 6 use Treat1*After instrument, respectively.
Panel A. Young: Age 50 or below; 31.5% of firms are young
Tobin’s Q
Young
MatureYoung
Mature
(1)
(2)
(3)
(4)
Number of outside-0.197** -0.077*** -0.157** -0.068***
directors(0.083)(0.029)(0.063)(0.022)
Firm fixed effects
Yes
Yes
Yes
Yes
Year fixed effects
Yes
Yes
Yes
Yes
First stage F-value
51.26
132.5692.73
183.28Observations
4691
10224
2865
6072
Panel B. Young: Age 45 or below; 26.5% of firms are young
Tobin’s Q
Young
MatureYoung
Mature
(1)
(2)
(3)
(4)
Number of outside-0.237**-0.063** -0.182** -0.055**
directors(0.097)(0.031)(0.075)(0.023)Firm fixed effects
Yes
Yes
Yes
Yes
Year fixed effects
Yes
Yes
Yes
Yes
First stage F-value
36.03
146.2766.55
201.06
Observations
3948
10967
2432
6505
Panel C. Young: Age 40 or below; 21.1% of firms are young
Tobin’s Q
Young
MatureYoung
Mature
(1)
(2)
(3)
(4)
Number of outside-0.238**-0.075** -0.182** -0.061***
directors(0.110)(0.032)(0.086)(0.023)Firm fixed effects
Yes
Yes
Yes
Yes
Year fixed effects
Yes
Yes
Yes
Yes
First stage F-value
29.08
154.1854.58
215.28Observations
3139
11776
1965
6972

42

Young
(5)

Mature(6)-0.121*-0.067**(0.065)
Yes
Yes
86.48
4691

(0.027)
Yes
Yes
139.88
10224

Young
(5)

Mature(6)-0.130*-0.054**(0.074)
Yes
Yes
68.6
3948

(0.026)
Yes
Yes
151.97
10967

Young
(5)

Mature(6)-0.133-0.054**(0.084)
Yes
Yes
58.93
3139

(0.027)
Yes
Yes
162.5511776

Table 6. Level of R&D Investment
This Table illustrates the impact of corporate governance reforms on firm value clustered by
the level of R&D investment. High and low R&D are defined in relation to firm medians.
Specifications 1 and 2 use Treat0, specifications 3 and 4 use Treat0d, and specifications 5 and
6 use Treat1 instrument, respectively.
Panel A. All firms
Number of outside directors
Firm fixed effects
Year fixed effects
First stage F-value
Observations
Panel B. TSE 1st section
Number of outside directors
Firm fixed effects
Year fixed effects
First stage F-value
Observations

Tobin’s Q
Low R&D High R&D Low R&D High R&D Low R&D High R&D
(1)
(2)
(3)
(4)
(5)
(6)
-0.099-0.106***-0.079*-0.106***-0.057-0.104***(0.062)(0.039)(0.047)(0.032)(0.049)(0.038)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
64.14
121.28103.64179.6988.98
141.21
7462
7453
4525
4412
7462
7453

Tobin’s Q
Low R&D High R&D Low R&D High R&D Low R&D High R&D
(1)
(2)
(3)
(4)
(5)
(6)
-0.033-0.125***-0.026-0.124***-0.001-0.126***(0.055)(0.047)(0.038)(0.038)(0.040)(0.043)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
83.23
83.07
116.56129.44
88.13
118
4752
4752
2706
2779
4752
4752

43

Table 7. Director Attributes
We divide firms into three groups. The first group of firms are those that did not appoint an outside director as of 2017 with a current or past
management position. The second are those that appointed an outside director with a current or past management position. The third are those thatappointed an outside director with a current management position. Specifications 1, 4, and 7 use Treat0*After, specifications 2, 5, and 8 use
Treat0d*After, and specifications 3, 6, and 9 use Treat1*After instrument, respectively.
Panel A. All firms

Number of outside directors
Firm fixed effects
Year fixed effects
First stage F-value
ObservationsNo(1)-0.120**(0.052)
Yes
Yes
78.71
8076

Past/Current(2)-0.062(0.042)
Yes
Yes
151.896225

Current(3)-0.050(0.039)
Yes
Yes
48.29
1999

No
(4)
-0.117***(0.044)
Yes
Yes
103.11
4672

Tobin's Q
Past/Current(5)-0.063**(0.032)
Yes
Yes
226.283864

Current(6)-0.050(0.034)
Yes
Yes
58.47
1363

No
(7)
-0.113**(0.053)
Yes
Yes
79.57
8076

Past/Current(8)-0.065**(0.032)
Yes
Yes
182.05
6225

Current(9)-0.040(0.057)
Yes
Yes
40.52
1999

No
(4)
-0.073*(0.042)
Yes
Yes
92.16
2325

Tobin's Q
Past/Current(5)-0.066*(0.036)
Yes
Yes
164.872934

Current(6)-0.086***(0.028)
Yes
Yes
34.99
1007

No
(7)
-0.067(0.052)
Yes
Yes
67.64
4337

Past/Current(8)-0.069**(0.034)
Yes
Yes
148.67
4813

Current(9)-0.072(0.074)
Yes
Yes
25.30
1485

Panel B. TSE 1st section

Number of outside directors
Firm fixed effects
Year fixed effects
First stage F-value
ObservationsNo(1)-0.090*(0.050)
Yes
Yes
80.60
4337

Past/Current(2)-0.059(0.053)
Yes
Yes
102.884813

Current(3)-0.090***(0.030)
Yes
Yes
25.12
1485

44

Panel C. Non-TSE 1st section

Number of outside directors
Firm fixed effects
Year fixed effects
First stage F-value
Observations

No(1)-0.172**(0.082)
Yes
Yes
41.80
3739

Past/Current(2)-0.128**(0.060)
Yes
Yes
76.12
1412

Current(3)-0.010(0.044)
Yes
Yes
34.14
514

No
(4)
-0.195**(0.085)
Yes
Yes
41.81
2347

45

Tobin's Q
Past/Current(5)-0.103*(0.063)
Yes
Yes
90.05
930

Current(6)-0.029(0.035)
Yes
Yes
37.85
356

No
(7)
-0.225**(0.105)
Yes
Yes
29.43
3739

Past/Current(8)-0.102(0.074)
Yes
Yes
57.46
1412

Current(9)0.024(0.070)
Yes
Yes
21.94
514

Table 8. Osaka Stock ExchangeThis table tests the relationship between the number of outside directors and firm value for the
Osaka Stock Exchange. The main findings remain robust. Specifications 1 and 4 use
Treat0*After, specifications 2 and 5 use Treat0d*After, and specifications 3 and 6 use
Treat1*After instrument, respectively.
Panel A. All OSE firms

Number of outside
directors
Other control variables
Firm fixed effects
Year fixed effects
First stage F-value
Observations(1)

Tobin’s Q
All OSE(2)(3)-0.149**-0.112*-0.097(0.074)
Yes
Yes
Yes
75.74
3351

(0.066)
Yes
Yes
Yes
118.082130(0.075)
Yes
Yes
Yes
95.10
3351

Panel B. OSE 1st or 2nd section and OSE other section
Tobin’s Q
OSE-1st or OSE-2nd
OSE-other
(1)
(2)
(3)
(4)
(5)
(6)
Number of outside-0.080** -0.092** -0.111** -0.721 -1.205 -1.585
directors(0.039)(0.036)(0.054) (0.604) (1.195) (2.191)
Other control
Yes
Yes
Yes
Yes
Yes
Yes
variables
Firm fixed effects
Yes
Yes
Yes
Yes
Yes
Yes
Year fixed effects
Yes
Yes
Yes
Yes
Yes
Yes
First stage F-value
59.32
80.92
44.62
41.64 73.18 62.41
Observations
851
559
851
2500
1571
2500

46

Table 9. Board Size
This table tests the relationship between the total number of directors (board size) and firm
value. The main findings remain robust. Specifications 1 and 4 use Treat0*After, specifications
2 and 5 use Treat0d*After, and specifications 3 and 6 use Treat1*After instrument, respectively.
Panel A. All firms


Board size
Other control variables
Firm fixed effects
Year fixed effects
First stage F-value
Observations

Tobin’s Q
All firms(1)(2)-0.122*** -0.140***(0.046)(0.048)
Yes
Yes
Yes
Yes
Yes
Yes
23.97
29.81
14915
8937

Panel B. TSE 1st section or non-TSE 1st sectionTSE-1st(1)(2)
Board size
-0.080** -0.092**(0.039)(0.036)
Other control variables
Yes
Yes
Firm fixed effects
Yes
Yes
Year fixed effects
Yes
Yes
First stage F-value
19.38
25.24
Observations
9504
5485

47

(3)
-0.153**(0.065)
Yes
Yes
Yes
19.06
14915

Tobin’s Q(3)-0.111**(0.054)
Yes
Yes
Yes
15.93
9504

Non-TSE-1st
(4)
(5)
(6)
-0.721-1.205-1.585(0.604) (1.195) (2.191)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
1.69
1.20
0.59
5628
3551
5628

Table 10. Placebo Test
This table uses 2008 and 2009 as the hypothetical (placebo) year of the reform. We use eightyear periods in each specification so that we have four years both before and after the reform.
We do not find any significant relation between the number of outside directors and firm value.
Specifications 1 and 4 use Treat0*After, specifications 2 and 5 use Treat0d*After, andspecifications 3 and 6 use Treat1*After instrument, respectively.
Tobin’s Q

Hypothetical year of thereformNumber of outside
directors
Other control variables
Firm fixed effects
Year fixed effects
First stage F-value
Observations

2008

2009

(1)

(2)

(3)

(4)

(5)

(6)

-0.710-0.538-0.537

0.350

0.516

0.657

(0.489)
Yes
Yes
Yes
2.84
13906

(0.426)
Yes
Yes
Yes
2.45
10836

(0.548)
Yes
Yes
Yes
1.44
13906

(0.283)
Yes
Yes
Yes
2.83
14186

(0.519)
Yes
Yes
Yes
1.33
10889

(0.862)
Yes
Yes
Yes
0.70
14186

48

Table 11. Definition and Data Sources
Tobin’s Q
Number of outside
directors
Percentage of outside
directors
Number of total
directors
Tangible assets/Assets
Liabilities/Assets
R&D expenses/Assets
Payouts/Assets
Cash flow/Assets
Ln(assets)
Exports/Sales
Foreign ownership(%)
Financial institution
ownership (%)
Audit & supervisorycommittee
Firm age
Treat0Treat0d

Treat1
After
TSE-1st compliance

Definition
Market capitalization plus total liabilities divided bybook value of total assets
The total number of outside directors

Data source
FinancialQUESTThe ratio of outside directors to total directors inpercentage
The total number of directors

NEEDS Executive Data

Tangible assets divided by lagged total assets
Total liabilities divided by lagged total assets
R&D expenses divided by lagged total assets
Dividends plus share repurchases divided by lagged
total assets
Operating earnings plus depreciation divided by total
assetsNatural Logarithm of total assets
Exports divided by lagged sales
The share of stocks held by foreign investors inpercentage
The share of stocks held by financial institutions inpercentage
Dummy variable that takes one if the firm adopts theaudit & supervisory committee system
Years since the establishment
Dummy variable that takes one if the firm had no
outside directors in FY2013 (i.e., March 2014)
Dummy variable that takes one if the firm had no
outside directors in FY2013 and takes a missing
value if the firm had one outside director in FY2013
Takes one if the firm had less than two outside
directors in FY 2013
Dummy variable that takes one from FY2014 (i.e.,
March 2015) onwards
Compliance rate of the Code among firms on the 1st
section of the TSE in a certain industry

FinancialQUEST
FinancialQUEST
FinancialQUEST
FinancialQUEST49

NEEDS Executive Data

NEEDS Executive Data

FinancialQUEST
FinancialQUEST
FinancialQUEST
FinancialQUEST
FinancialQUESTNEEDS Executive Data
FinancialQUEST