Kyoto University,
Graduate School of Economics
Research Project Center Discussion Paper Series

The relation of cause and effect between the percentage of
foreign shareholders and the number of employees inJapanese firm

FUKUDA Jun

Discussion Paper No. E-09-006

Research Project Center
Graduate School of Economics
Kyoto University
Yoshida-Hommachi, Sakyo-ku
Kyoto City, 606-8501, Japan

March, 2010

The relation of cause and effect between the percentage of
foreign shareholders and the number of employees inJapanese firm

FUKUDA Jun*.

Abstract
Foreign shareholders have purchased many stocks issued by
Japanese firms in recent years. Thus, they are expected to have astrong influence. In this paper, I analyze whether or not foreign
shareholders demand changes in the number of employees in thefirms of the foods, chemical, glass, electronic products, landtransportation, warehousing or wholesale industries on the basis of
the financial data from the fiscal year 1997 to 2007. The analysis
showed that the number of employees increase if foreign
shareholders

purchasestocksinthechemical

and

land

transportation since managers gain confidence if foreign investors
actively invest their company. On the other hand, foreign
shareholders tend to invest firms which are going to reduce thenumber of employees in the electronic product.

* Graduate School of Economics, Kyoto University,

E-mail: fukudajun09@gmail.com

11. Introduction

The behavior of firms is supposed to change as the percentage of each shareholderchanges. In this paper, I examine whether foreign shareholders, which have actively
purchased shares issued by Japanese firms, demand changes in the number of
employees in Japanese firms. Long-term employment, guaranteed by Japanese firms,
is threatened by foreign shareholders. If this approach is accurate, the number of
employees in firms that have a large percentage of foreign shareholders should beconsiderably reduced. However, most managers in Japanese firms seem to maintainthe traditional Japanese employment pattern. In this paper, I analyze whether or notforeign shareholders have demanded changes in the number of employees in the firmsof the foods, chemical, glass, electronic products, land transportation, warehousing orwholesale industries. As a result, it is found that the number of employees has
increased by the effects of foreign shareholders in the chemical and landtransportation. In other words, it is thought that managers who have obtained
confidence by investments of foreign shareholders have actively hired employees. On
the other hand, it is found that foreign investors tend to invest firms which are
expected to decrease the number of employees in the future in the electronic products.
Next, at the Figure 1, I will introduce the composition of the percentage ofshareholders in Japanese listed firms from fiscal year 1997 to 2007. As this figure, thepercentage of bank has decreased. On the other hand, the percentage of foreign
shareholders has increased. After all, in fiscal year 2007, foreign shareholders are thelargest shareholders in Japan.

2

Figure 1 The trend of the percentage of shareholders in Japan
30
25
20
% 15
10
5
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Fiscal yearBanks
foreign shareholers

Non-financial firms
Individuals

Source: Tokyo Stock Exchange: Kabushiki Bunpu Jokyo Chosa*

2. Analysis method

In this section, I will introduce the method and data used in this paper†. I collected
the financial data from the NEEDS Financial Research Database. The target period isfrom the fiscal year 1997 to 2007. The target firms are those belonging to the foods,
chemical, glass, electronic products, land transportation, warehousing or wholesaleindustries and were listed in the first or second section of the Tokyo, Osaka, Nagoya orother region Stock Exchanges on March 31, 2008. I had to adjust the financial terms
since I used panel data. Therefore, I used the financial data from those firms that were
sustained at the close of the fiscal year in March during this period.
In this analysis, the dependent variable is the percentage of change in the number of
employees. The independent variables are the change in sales adjusted by the priceindex‡, the change in capital intensiveness, which is the ratio of tangible fixed assets
http://www.tse.or.jp/market/data/examination/distribute/h20/distribute_h20a.pdf
Abe (2005) is foregoing study in this field. However, this analysis does not contain the
research about foreign shareholders.
‡ The price index is the total average of the domestic firms’ price index in March eachyear that is published by the Bank of Japan.
*†

3

adjusted by the price index to the number of employees, the capital ratio (equity capital
divided by total asset), the percentage of foreign shareholders, the logarithm of laborcosts per employee adjusted by the price index, ROA (return on assets, operating profit
divided by total asset), logarithm of the number of employees, the subsidiary firm
dummy. Moreover, the data of parent-only earnings is used in this analysis. Next, Ishow the regressive equation in the following manner. In addition, regressions are
estimated by OLS (ordinary least squares). Equations contain a cross section effect anda period effect.

Equation 1( yit +1 − yit ) / yit = β 0 + β1 z1,it + β 2 (z 2,it − z 2,it −1 ) / z 2,it −1 + β 3 (xit − xit −1 ) + β 4 z 3,it
+ β 5 z 4,it + β 6 (z 5,it − z 5,it −1 ) / z 5,it −1 + β 7 z 6,it + β 8 ⋅ Dit , sub + α i + γ t + u it

y it +1 ：The number of employees in firm i for the fiscal year t+1
y it ：The number of employees in firm i for the fiscal year tz1.,it ：The capital ratio in firm i for the fiscal year tz 2.,it ：The change of capital intensiveness in firm i for the fiscal year tz 2.,it −1 ：The change of capital intensiveness in firm i for the fiscal year t-1
xit ：The percentage of foreign shareholders in firm i for the fiscal year t
xit −1 ：The percentage of foreign shareholders in firm i for the fiscal year t-1
z 3.,it ：The logarithm of labor costs per employee in firm i for the fiscal year
z 4.,it ：The ratio of operative profit to total asset (ROA) of firm i for the fiscal year tz 5.,it ：Sale of firm i for the fiscal year tz 5.,it −1 ：Sale of firm i for the fiscal year t-1
http://www.boj.or.jp/type/stat/dlong/price/cgpi_2005/g05_1001.csv
4z 6.,it ：The logarithm of the number of employees of firm i for the fiscal year t
Dit , sub ：The subsidiary firm dummy variable assumes the value of one if firm i is a
subsidiary firm for other firms for the fiscal year t.

α i ：The firm dummy: cross section effect
γ t ：The time dummy: period effectu it ：Error term

3． Results and discussion

First, I will introduce the results for each independent variable and will summarize
them in Tables 1.
The coefficient of the percentage of foreign shareholders is significantly positive inthe chemical and land transportation and significantly negative in electronic product.
However, this result does not guarantee that the change of percentage of foreign
shareholders affects the change of the number of employees. The change of theemployees one year after which is previously expected may affect the change of thepercentage of foreign shareholders. For example, foreign shareholders may tend toactively invest firms which are expected to fire employees in the electronic products. In
addition, foreign shareholders do not welcome for managers to hire more employees
since the behaviors of foreign investors are friend to market. So, it is impossible that
foreign shareholders demand to hire more employees in the chemical and landtransportation industries. In next estimation, I carry out further examination in theseindustries. On the other hand, the coefficient of foreign shareholders is not significant
in other industries. This implies that the relation of cause and effect between thechange of the percentage of foreign shareholders and the change of the number of
employees does not exist in these industries.
Next, I mention about other variables. The coefficient of ROA is significantly positive
except the glass and wholesale industries. This implies that the number of employees
increases if ROA becomes better. In this analysis, non-regular workers are considered.
As the wholesale industry, since the number of non-regular workers is large, the effectof ROA may not be identified. Moreover, the coefficient of the change in capitalintensiveness is significantly negative in the food, chemical, electronic products and5

land transportation industries. This implies that the number of employees decreases
since the productivity of the labor is improved. In addition, the coefficient of thelogarithm of the number of employees is significantly negative except landtransportation. This implies that firms whose number of employees is large must or
can fire more employees. The coefficient of the change of sales is significantly positivein the chemical, glass, electronic and land transportation industries. The larger thesale of the firm is, the larger the number of employees is in these industries. However,the coefficient of the change of sales is significantly negative. From results of ROA,
change of sales and logarithm of the number of employees, firms in the wholesaleindustry hire excessive the number of employees. Then, firms in this industry compete
downsizing themselves. This is why firms whose sales are large decrease the numberof employees. Lastly, the coefficient of the labor cost is not significant. So, it is
supposed that the relation of cause and effect between the labor cost and the change ofthe percentage does not exist.

6

Table 1 Result 1
foodchemicalglass

electornic

Land transportation

Warehousing

Wholesale-6.191
11.51
0.012
0.020
-0.082***0.023-0.061
0.128-3.2186.389
0.028*
0.012-0.036*0.014
0.165**
0.064-20.0586.35-0.1180.113-0.020
0.019
0.078
0.204

-7.552
7.211
0.022
0.013
-0.024*0.011-0.116+
0.063

2.637
7.031
0.037
0.028
-0.059*0.023
0.439*
0.201

30.53*
14.97-0.103*0.045-0.051
0.052
0.398
0.330

307.5**
117.9
0.048
0.125
-0.0140.022-0.080
0.277

0.626
0.768
0.611***
0.109-0.0120.049-1.325***
0.357

0.225
0.409
0.332***
0.065
0.111***
0.025-0.781**
0.238

6.545
5.005
0.160
0.247
0.142*
0.058-11.71***
3.116

0.536
0.471
0.326***
0.071
0.095***
0.021-0.608**0.223-0.5220.401
0.878***
0.189
0.204**
0.072-0.3990.337-1.3761.015
1.025*
0.405-0.0580.111-1.676+0.954-3.047
6.258
0.430
0.454
-0.095*0.047-43.48***4.612

Cross section effect-0.826
2.280
Random3.231**
1.082
Random

-3.849
4.199
Fixed

0.916
0.895
Random0.714
2.217
Random

-3.137
2.856
Random-2.116
5.096
Fixed

Period effectRandomRandomNo

RandomRandomRandomNo

Durbin-Watson stat

1.988

1.733

1.769

1.837

2.045

1.327

2.315

N

540

1017

279

1305

360

270

1224

Adjusted R-squared

0.119

0.123

0.266

0.071

0.223

0.034

0.099

F-statistic

10.12***

18.84***

3.654***

13.39***

13.84***

2.199*

1.940***

Constant
Capital ratio
Change in the degree of capital intensiveness
Percentage of foreign
shareholders
Labor costs per employee
ROA
Change in sales
Logarithm of the numberof employees
Subsidiary dummy

Notes: The upper rows denote the values of the coefficients. The lower rows denote the standard errors of the coefficients. ***,** , *, and + denote coefficients significant at the 0.1%,
1%, 5%, and 10% levels.

7

Next, I will estimate the Equation 2. In this equation, the dependent variable isthe change of the percentage foreign shareholders. On the other hand, dependent
variables are other valuables in the future such as the change of the number of
employees one year after. In other words, the position of the change of the percentageof foreign shareholders and the change of the number of employees is the inverse of
Equation 1. This estimation explains whether the change of the number of employees
one year after affects the change of the percentage of foreign shareholders or not. I
assume that the real numbers of data are equal to the number expected in one year
after. As you see Equation 2, independent variables are the variable of the future. The
variables in Equation 2 are most similar to Equation 1.
Equation 2xit − xit −1 = δ 0 + δ 1 z1,it + δ 2 (z 2,it +1 − z 2,it ) / z 2,it + δ 3 ( y it +1 − y it ) / y it + δ 4 z 3,it

+ δ 5 z 4,it + δ 6 (z 5,it +1 − z 5,it ) / z 5,it + δ 7 z 6,it −1 + δ 8 ⋅ Dit −1, sub + κ i + λt + ε it

κ i : The firm dummy: cross section effectλt : The time dummy: period effectε it : Error term
Note: As other variables, see Equation 1.

I will introduce the results for each independent variable and will summarize themin Tables 2.
First, I introduce variables except change of the number employees one year after.
The coefficient of ROA one year after is significantly positive in three industries. It is
implies that foreign shareholders actively invest the firm whose profitability of the
future is high. In addition, the coefficient of the change of sales one year after issignificantly positive in the electronic products industry. It is implies that foreign
shareholders actively invest the firm whose sale becomes bigger in the future in theelectronic product industry.
Second, the coefficient of the change of the number of employees in the future is not
significant in the chemical and land transportation. So, it is not thought that thechange the number of employees in the future which is previously expected affect thechange of the percentage of foreign shareholders. In addition, it is thought that foreign
shareholders do not want for firms to hire more employees since they do not welcome
higher labor cost. According to the result of table 1 and 2, it is thought that manager
have confidence and decide to hire more employees if foreign shareholders invest in thechemical and land transportation. However, foreign shareholders do not welcome thesemanager’s behaviors. Next, the coefficient of the change of the number of employees in
the future is significantly negative in the electronic product. In addition, thissignificant level is higher than that in the coefficient of the change of the percentage of
foreign shareholders at Table 1. So, it is thought that the change the number of
employees in the future which is previously expected affect the change of the8percentage of foreign shareholders. According to the result of table 1 and 2, it isthought that foreign investor actively purchase stocks of firms whose the number of
employees is going to decrease in the electronic product.
Table 2 Result 2
Constant
Capital ratio (+1)
Change in the degree of capital intensiveness (+)

Change of the number of employees (+1)
Labor costs per employee (+1)
ROA (+1)
Change in sales (+1)
Logarithm of the numberof employees
Subsidiary dummy

Cross section effect
Period effectDurbin-Watson statN
Adjusted R-squared
F-statistic

chemical-4.797+2.793-0.004
0.005
0.009
0.007
0.027
0.016
0.214
0.180
0.127***
0.028
0.018
0.013
0.323**
0.103

electronic-4.362
3.011
0.002
0.006
0.008
0.005
-0.025*
0.013
0.169
0.197
0.164***
0.028
0.026**
0.009
0.281***
0.093

Land transportation-4.193*1.822-0.002
0.007
0.007
0.008
0.019
0.019
0.123
0.105
0.108*
0.048
0.031
0.019
0.347***
0.084-0.938+
0.557
No
Fixed
2.186
1017
0.139
11.23***-0.172
0.435
No
Fixed
2.348
1305
0.143
14.65***

0.130
0.633
No
Fixed
2.056
360
0.166
5.452***

Note: See table 1.

4. Summary

The following is a summary of my analyses. The result implies that manager haveconfidence and decide to hire more employees if foreign shareholders invest in thechemical and land transportation. On the other hand, the result implies that foreign
investor actively purchase stocks of firms whose the number of employees is going todecrease in the electronic product. However, in other industry, the relation of cause andeffect do not exist between the change of the number of employees and the change ofthe percentage of foreign shareholders. After all, foreign shareholders themselves do
not reduce the number of employees. This implies that the effect by foreign
shareholders is limited.
Lastly, I will introduce the disadvantages of this paper and future issues. The
conclusions in this paper need to be rethought since the number of employees
mentioned in this paper are both regular and non-regular workers. Moreover, in thispaper, I have not analyzed the effect of the labor unions on the change in the number of
employees. For future research, the effect of the labor unions needs to be considered. In
9addition, the date of data which is used in this paper is until March 2008. However,after then, a number of Japanese firm are forced to decrease the number of employeesby the effect of financial crisis occurred at America. We have to study the relationshipbetween the structure of governance such as foreign shareholders and the effect of thiscrisis. Moreover, we have to remember that the coefficient of foreign shareholders is
not significant in many industries. This implies that institutions which protect
managers from the pressure by foreign shareholder exist in Japan. It is thought thatthese institutions are Defense from Hostile TOB and revival of cross shareholding inrecent years. These institutions are needed to be analyzed in the future.
References
・Abe, M. (2005) “Koyo Chosei Sokudo no Henka to Kigyo no Ganabansu Kozo (Thechange of the speed of the adjustment of the employees and the structure of thegovernance)”, in M. Abe. Nippon Keizai no Kankyo Henka to Roudou Shijo (Theenvironmental change of Japanese Economy and Labor Market) chapter 6, Toyo Keizai
Shinposha, pp. 149-70 (in Japanese).

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