ISSN 2189-9592

Journal of Japanese Management
Vol. 2, No.2, May 2018

JFMRA
Japan Federation of Management Related
Academies

Editor-in-Chief
Fangqi Xu (Japan Creativity Society, Kindai University)
Editors
Yukio Takagaki (Japan Academy of Management, Surugadai University)
Yasutaka Kainuma (Japan Industrial Management Association, Tokyo Metropolitan University)
Editorial Board
Shintaro Abe (Japan Academy of Consumer Education, Josai International University)
Noriyuki Hamaoki (Japan Academy of Enterprise and Business Administration, Chuo Gakuin
University)
Hisamitsu Ihara (Japan Society for Applied Management, Tokyo Fuji University)
Taketoshi Ikeda (Association for the Study of Industrial Management (Japan), Chiba Universityof Commerce)
Tomihiro Katayama (Japan Academy for Consumption Economy, Nakamura Gakuen
University)
Hiroshi Obata (Japan Accounting Association, Hitotsubashi University)
Jun Oeki (Lanchester Society, Tokyo University of Science)
Chikako Oshima (Japan Foundation for International Tourism, Tsukuba Gakuin University)
Makoto Takahashi (Japan Creativity Society, Japan Professional School of Education)
Masayasu Takahashi (Japan Academy of Business Administration, Meiji University)
Akira Uchino (Japan Society of Business Mathematics, Senshu University)
Hideo Ueki (Knowledge Management Society of Japan, Tsukuba Gakuin University)
Katsutoshi Umeda (Global Academic Society, Kyushu Kyoritsu University)
Masamichi Yoshioka (Global Academic Community, Tokyo University of Science)
Advisory Board
Kazuo Hiramatsu (Japan Accounting Association, Kwansei Gakuin University)
Nobutaka Kazama (Association for the Study of Industrial Management (Japan), Meiji
University)
Takayuki Nonoyama (Japan Association for Management Systems, Aichi Sangyo University)
Takao Nuki (Association for the Study of Industrial Management (Japan), Musashi University)
Koji Okubayashi (Japan Society of Human Resource Management, Osaka International
University)
Yoshihiro Tokuga (Japan Accounting Association, Kyoto University)

ISSN 2189-9592

Journal of Japanese Management
Vol.2, No.2, May 2018

JFMRA
Japan Federation of Management Related
Academies

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Contents

Characteristics of an Innovation Adopter’s Network and the Information
in a Diffusion Process ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・p.1
Mariko Tsutsui

Recommended paper by Japan Academy of Management
Organizational Design in Modern Firms and the Role of Corporate Management:
Relationships of Organizational Change with Trust and Creative Capacity・・・・・・p.12

Nobuhiko Yamanaka

Recommended paper by Japan Accounting Association
Regulation FD, Analysts’ Information Acquisition, and the Public Goods Problem・・・p.23

Manabu Kotani

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

Characteristics of an Innovation Adopter’s Network and theInformation in a Diffusion Process
Mariko Tsutsui

Faculty of Business Administration, Kindai University, Osaka, Japan
Japan Academy of Business Administration
Abstract:
The purpose of this paper is to clarify the information creation activities by innovation
adopters and to analyze the contents of that information in the process of innovation diffusion.
For the adopter, an innovation has never been used before and, therefore is characterized by ahigh level of uncertainty for him. In this paper, we assume that there is a relationship ―kindof “communities of practice (Lave and Wenger 1991)” ― in which innovation adopters are
creating information together, considering for example the doctor’s networking in the diffusion
process for drug A. The information created in that doctor’s network, perhaps a research paper,is considered to be important information when other doctors make decisions to adopt that new
drug A. Hence, we analyze the content of the paper. As a result of the analysis, in the first halfof the diffusion period, research was conducted with groups that included special experts in thefield. In the latter period, a group that does not necessarily have experts was conducting
research. Regarding the content of information created by the doctor’s network, in the first halfof the drug diffusion period, research on the early stage of dosing of drug A was conducted, andin the latter period, research on the next stage of dosing, such as side effects, was conducted. We
conclude that the doctor’s network creates information, and that the content of that information
will vary depending on the stage of innovation diffusion.
Keywords
diffusion of innovation，co-authorship network, communities of practice, Qualitative Data Analysis,
the pharmaceutical industry(1) Introduction
Products

accept new technology, and the resulting
althoughtheory suggests that people accept new

excellent, may not enjoy wide popularity.

technologies when they reach a satisfactory

There

and

level in terms of technology use. However,development in the field of management

Moore (1991) points out that some high-theory. However, there is lack of study on thetechnology products cannot spread widely.

has

and
been

services,muchresearchmatter of diffusion.

Rogers (2003) argues that individuals

Christensen (1997) states that people

who actively work toward the reduction of1

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

uncertainty in innovation innovate in theirthose doctors who were integrated into thesedecision processes as well. One way to

network and those who were isolated”

reduce uncertainty of innovation is to test it.

(Coleman et al., 1966, p.79). Early adopters

If it is not easy, they then try innovation

were doctors whose networks were enhanced

temporarily; “trial by others” (Rogers, 2003,

by a colleague who adopted a new drug early,

p.177) as an alternative proposal. In thewhereas isolated doctors were late adopters.

subsequent

Therefore, doctors reduce the uncertainty ofsection,

a

case

study

is

presented that show how peer informationa new drug with organizational power.

promotes diffusion of innovation.
This study focuses on the innovation
adopter’s

network

andits

2. Clinical information as complementary

sharedassetsinformation. ITs main objective is theTeece(1987)

elucidation of mechanism of diffusion bynecessary

analyzing the adopter’s network and theirinnovation

information in the pharmaceutical industry.

solutions to customers. Therefore, a few

tomentions

bridge

and

that

it

is

the

gap

betweenproblems

toprovidethings that fills this gap are “complementary(2) Literature review

assets,” such as distribution and after-sales

1. Medical innovation study

service. In this paper, we assume that one of

Coleman et al. (1966) studied thethe complementary assets of a new drug ispattern of diffusion of a new dug. Theyclinical information. We presume that thedistinguished a sequence of founts of

information as complementary assets is one

information pertaining to a new drug by

with network externalities (Tsutsui, 2011).

diving them into three sources: primaryHence, if there are competing products,

source, intermediate source, and final source.

securing

The highest percentage of the primary

immediate necessity in order to be the top

source (of information that doctors know adrug picked by doctors.

new drug for the first time) was from theThecriticalmass

becomes

aninformation as complementarydetails man within a given pharmaceuticalgoods strongly promoting the reach ofcompany. Likewise, the highest percentage

innovation has the characteristics of aof intermediate source came from the details

network externality.

man. However, the final source, in otherwords, the information used when making a

3. Communities of practice as the parent

decision,body of learningwasdifferent.

Thehighestpercentage of the final source was the

The concept of communities of practicedoctor’s colleague. This result showed thatis an effective means to clear the mechanism

doctors had much confidence in existingby which clinical information is generated

users. In addition, there was a difference atand shared. The concept of communities of

the time of new drug adoption “between

practice, proposed by Lave and Wenger
2

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592(1991), is cited in the field of management

down with a university hospital. Therefore,

theory1991).

in the next section, I tried to clarify theirCommunities of practice are “groups ofresearch connection using co-authored data

people who share a concern, a set ofof the paper.

(BrownandDuguid,problems, or a passion about a topic, andThe logic of this paper is arranged

who deepen their knowledge and expertise

follows. It is assumed that a doctor decides

in this area by interacting on an ongoingon adopting a new drug based on thebasis” (Wenger et al., 2002, p.4). They

information

presented a case of the Tech Clubs as analready uses the drug as part of his new

example of communities of practices. When

medical supplies. It is assumed that doctors

Chrysler was changed from a functional

adopt various methods to share information

structure to product-oriented structure andwithengineers had to be allocated in separate

interaction and participating in workshops.

units. It means that engineers lost a chance

In this study, we consider papers

to learn from each other. Through thesepublished in academic journals as important

processes, the manager decided to assist insources of information pertaining to thegetting engineers to interact with each other.

decision to adopt a new drug, thus, weEngineers connected informally under the

analyze the paper’s data. In many cases,name of the Tech Clubs.

papers are written by multiple authors.

Similarly, a

doctor can become a

Therefore, it is possible to discover amember of a practice community when

network of doctors who collaborate to write

obtaining medical knowledge at a medicala paper at the time of a new drug’s diffusion.

school.

Tsutsui(2011)

considered

otherthat adoctors,

trustworthy

both

by

doctorpersonal

theconnection of communities of practice to(3) Network analysis of new drug diffusion

influence the adoption of a new drug and

1. Data source and analysis methods

conducted further research. Tsutsui (2011)

The present study focuses on drug A,

assumed that a university hospital was theavailable on the market since 1999 for thecore element of doctors’ communities oftreatment for Alzheimer's disease.

practice and examined an adoption rate of a

Date were gathered from representative

university-affiliatedthree journals in this field –the Japanesehospital. As a result of research, an adoption

Journal of Geriatric Psychiatry, the Journal

rate of a new product in a university-of Japanese Society for Dementia Care, andaffiliated hospital was higher than in those

the Japanese Journal of Geriatrics. Then,that had not adopted the new product.

the authors ’ data were collected fromnewproductinaThis paper studies the influence of such
communities

forlearning

papers (around 2014) containing the name of

medicaldrug A (whether having brand name or aknowledge pertaining to the adoption of ageneric one) in the title. By recognizing co-

new drug. However, doctors will not be tiedauthored relationship as communities of3

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

practice that collaborated on writing a paper,

example of an m-slice. When there are fiveresearch networks were extracted. A total ofarticles (paper A is single-authored, papers

146 papers were collected from Ichushi

B, C, D and E are multi-authored) and sevenservice (http://www.jamas.or.jp/), with total

authors (Table 1), Figure 2 may be drawn.

listed authors was 753, and the actual
number of authors being 480. Authors with

Table 1. Five papers and seven authors

the same family and surnames name werePaper A1

treated as one person.

Paper B2, 3

Research was actively conducted twice

Paper C2, 3, 4during 2000 – 2014 (Figure 1). Therefore,

Paper D3, 4, 5

we divided the period into two phases: 2000

Paper E6, 7

- 2006 (Phase1) and 2007 - 2014 (Phase 2).

Source: Prepared by author.

The number of papers and authors in eachperiod were 74 and 265, respectively, in

1Phase 1, and 72 and 256 respectively (41being published in both phases). There wasnosignificant

difference

between2

thenumber of articles and the number ofauthors in each periods. Most of the authors
1

are presumed to be doctors as per the nameson the paper.
25

Figure 2. The relation of seven authors

20

Source: Prepared by author.

15

In Figure 2, numbers within the curve

5line are the number of times of co-authorship

0(n). Authors of papers B, C and D are
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

10

connected in the big oval of Figure 1. In that
oval, there is no joint work experience, yet

Figure 1,Ｔhe number of paper per year

authors 2 and 5 can connect through authors

Source: Prepared by author.

3 and 4. Thus, it is possible to draw two
networks and an isolated vertex of one

2. Networks in both periods

person using the m-slice technique.

The networks of authors in the two

The respective authors of Phase 1 wrote

periods were defined. The contours werea total of 74 papers and 72 in Phase 2, drawn

drawn

from

using

an

m-slicetechnique innetworks based on the method proposed bythese

networks

using

the

aforementioned method. As a result, 35

DeNooy et al. (2005). The following is an
4

Journal of Japanese Management Vol.2, No.2, May 2018

networks were formed for Phase 1, and 31

ISSN 2189-9592

the pharmaceutical company.

for Phase 2. When one regards as theTheinterviewbrought

annumber of the persons who form the network,

environmental understanding surrounding

it becomes clear that a dominant network of

the treatment for Alzheimer’s disease andPhase 2 is of a larger scale than that of Phasethe

1 (Table 2).

information obtained from the interview was

ideas

of

these

researchers.

The

helpful to understand the influence upon the
Table 2. The composition of members ofdiffusion of drug A from the list of 480

the top three networks

surveyed authors.
The network was divided such that a2000 - 2006

2007 - 2014

1st place25

48

person supposed to be influential in the

2nd place16

21

diffusion of drug A was might be included in

3rd place15

17

more than one network or in none of them.

Source: Prepared by author.

As a result, the percentage of networks inwhich an influential person is included

There is no significant difference in the

become the Phase 1 percentage, which isresult of the m-slice in phases 1 and 2 (Table

higher than Phase 2’s (Table 4). Therefore, it3). The result of m-slice in both phases wereappearsa minimum value of 0 and maximum of 9.

influential person is necessary because of

that

the

cooperationofanthe uncertainty surrounding a new drug’s
Table 3. Result of the m-slice in two phases

sales. Figure 3 shows that drug A wasm-ofdiffused rapidly within the first 10 years

slice authors of Phase authors of Phase(2000 through 2010). The information that

Number1

ofNumberreduces uncertainty and promoted the

2

0

4

7

spread of drug A was considered in the

1

197

188

papers included in Phase 1.

2

47

52

3

14

2

4

0

3

5

2

0

9

3

4

Table 4. Percentage of networks where aperson influencing the spread of drug A was
included
periodSource: Prepared by author.
3. Interpretation of network

The numberof network

percentage

2000 - 200617

49%(17/ 35)

2007 - 201410

32%(10/31)

Source: Prepared by author.

The insight was provided when I
interpreted the network from using theinformation that got from the interview to5

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

frequency and interpreted using information
obtained from interviewing pharmaceuticalcompanies.
2. Data Analysis and Findings
A keyword consists of main heading and

2015

2013
2014

2011
2012

2009
2010

2008

2006
2007

2004
2005

2002
2003

2001

2-1.Keyword
subheading, e.g., in case of “Alzheimer’s

Figure 3. Sales trend of drugdiseaseA
Source: Prepared by author.

“Alzheimer’s disease” is the main heading(pharmacotherapy),”whereand “pharmacotherapy” is the subheading.
In addition, the structure of the top-

The frequency order keyword of each

three network, m-slice, and centricity of eachperiod is compared in 2-1-1. Then, thenetwork was considered, but we were not

keyword that appears in either phase isable to find any effective discovery about thechosen and compared in 2-1-2.

diffusion of new drug.
2-1-1(4) Features of the information regarding

Comparisonoffrequencyofallkeywords

the diffusion of drug A: A qualitative data

In Phase 1, the first keyword wasanalysisgeneric name of drug A; second, Alzheimer

1. The data source and analysis methods

Disease; third, dementia. In Phase 2, in the

In this paper, three kinds of qualitative

first place was “Alzheimer Disease”; second,

data were analyzed: keywords were given to

generic

name

of

drug

A;

and

each thesis, the paper title, and abstract.

“treatment outcome” (appendix A).

third,The keyword was given to each thesis by

In Phase 1, there are eleven papers with

Ichushi service. For this reason, there is no

keywords of generic name of drug A whose

problem that keyword for giving rules are

subheading is “pharmacology”; consequently,

different for each journal. The paper that

we can see that it is focused on research on

appeared in Japanese Journal of Geriatric

this new drug.

Psychiatry was used based on the title andIn Phase 2, since there are papers to

the abstract. A total of 97 titles and abstracts

which subheading of “complications” is givenof papers were used. The titles and abstracts

to “Alzheimer disease” and papers to whichof papers are analyzed using qualitative

subheadings of “adverse effects” are given todata analysis software NVivo 11. The

generic name of drag A, at this phase, it can

keyword can be used to interpret data

be said that research is being conducted towithout

becauseimprove the accuracy of medication results.

keywords present in-depth classification.

Although the keyword of “treatment

using

data

software

The keywords were arranged in the order ofoutcome” did not rank within the third rank
6

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

in Phase 1, it is the third keyword in Phase

frequently appearing in the papers on

2. As can be seen from here it takes a long

Alzheimer’s disease.

time to produce the result of treatment for
Alzheimer’s disease.
2-1-2 Comparison of frequency keyword(only in either phase)In addition, keyword that are commonly
given in the two periods are excluded, only
keyword that are given only to papers ineach period are extracted and analyzed.
In Phase 1, it is presumed that the

Figure 4. Frequency word in the title inrelation between the administration of drug

Phase 1

A to patient and the function of the brain is

Source: Prepared by author.

being studied, because keywords indicating
Competitive products

names of a part of the brain and a disease
occurring in the brain was seen.
With regard to keywords given to thepaper in Phase 2, keyword related to adverse
effects such as digestive system diseases andanorexia have come to be seen. This suggeststhat research on the results obtained byadministering drug A "settled" to some

Figure 5. Frequency word in the title inextent, so it can be inferred that the interest

Phase 2of researchers has shifted to the adverse

Source: Prepared by author.

effects of next concern.
Comparison of figures 4 and 5 gave us
2-2. Title

the next discovery.

The title of the thesis was separated in

The word having the highest degree of

the Phase 1 and the phase and frequency

frequency in Phase 1 was “medication

words were picked out using a qualitative“(middle of Figure 4). The context of thedata analysis tool (NVivo 11). The charactersword–medication–was

and words were widely defined so that thefacilitated beginning to prescribe drug A andfrequency of their appearance was highthe effect of the prescription of drug A, and(Figure 4). Words like Alzheimer,

dementia,

considerationdisease, type, name

A wereprescribed.

establishedasof drug

prohibited

terminologies

of

The

the

reportwhether
context

drug
of

the

that

A

is

word

“therapeutics” (the lower one of Figure 4)

because these words are general words

was
7

the

considerationoftherapeutics

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

strategy and administration of drug affairs.

lower one of Figure 7). The context of the

The word having the highest degree ofword group was the article in which thefrequency in Phase 2 was “therapeutics”

patient’s data are classified by various(middle of Figure 5). The context of the word

factors (e.g., group to which the drug was“therapeutics”

ofgiven and group to which the drug was not

administration of drug to patient on disease.

given, high-dose group and low-dose group,

Additionally, the other Alzheimer’s disease

young group and the over-80 group), and it

curatives on market since 2011 are shown in

was thus compared and examined.

was

the

effectFigure 5. The new drugs sold from othercompanies are competitors to drug A at thesame time as these drugs are able to be used
together.

Therefore,

some

papersonswitching from drug A to new drugs, otherpapers on the results of combined use withdrug A have also been reported.
2-3 Abstract

Figure 6. Frequency word in the abstract inFrequent terms of the two phases of thePhase 1

abstract were analyzed using a qualitative

Source: Prepared by author.

data analysis tool (NVivo 11).
The most frequently appearing word in
Phase 1 was “group” (middle of Figure 6).
The context of the word medication was thereport that divided part of the data among
treatment group and non-treatment group
and analyzed the condition. The word thathas the second highest degree of frequency
in Phase 1 was “medication” (the lower one

Figure 7. Frequency word in the abstract inof Figure 6). The context of the word

Phase 2

medication was reported, which is as a result

Source: Prepared by author.

of the patient who took drug A for the firsttime.

(5) Finding and explanation for findings

The word having the highest degree ofFrom network analysis and qualitative

the frequency in Phase 2 was “therapeutics”

data analysis, the following findings were(middle of Figure 7).

determined about the doctor’s network of

The context of therapeutics was varied.

and the contents of the information created

The word having the second highest degreeby that network during the period ofof frequency in Phase 2 was “group” (thediffusion of drug A period.
8

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

When the diffusion period is divided into

Therefore, it is necessary to acquire critical

two stages, in the Phase 1, many of themass quickly when there is a competitive

research group on drug A is participatingproduct. Because competitive product was

specialists who are influential in the

not released at the time of release in drug A,

diffusion process. On the one hand, theit was not threatened by a competitive

reason is assumed that specialists were

product.

indispensable to the research group on thethoroughly inform doctors even when the

period where large uncertainty of drug A

products excellent.

However,

itisnecessarytoexists. On the other hand, in Phase 2, there

In fact, according to Nikkei Medical, inare many groups that specialists do not

the year when drug A was released, there isparticipate in. In those periods, diversity

a description that points out that drug’s

within the research theme increasing is“batting average” is 20%, that is, there wasconsidered.

a tendency to underestimate. If a customer

It

was

assumedresearch

feels that the degree of product uncertainty

foundation was established during Phase 1,

is high, even if it is a superior productand various studies bloomed as a result offunctionally, and even in the absence ofPhase 2.

conspicuous

that

a

The forgoing hypothesis about thecompetition,complementary

assetsbuilding

calleduser

transition of the above research contents

information is necessary for products towas demonstrated in the result of adiffuse widely.

qualitative analysis. As a result of thequalitative analysis of the article dealing

Referencewith drug A, the research carried out in

Brown, J. S., and Duguid, P. (1991).

Phase 1 was a research before the start ofOrganizational

the administration of drug A to patient orCommunities-of-Practice:

immediately

its

Unified View of Working, Learning,

administration. In Phase 2, the following

and Innovation, Organization Science,

two points were clarified. One can see that

2(1): pp.40-57.

after

starting

Learning

andTowardaresearch on comparing and combining

Coleman, J. S., Katz, E., and Menzel, H.

competitive drug competitor and drug A is(1966) Medical Innovation: A Diffusion

conducted. Secondly, in Phase 2, there are

Study: Bobbs-Merrill.Co., Inc.（小口一many reports of side effects. In short, the元/宮本史郎訳『販売戦略と意思決定』ラ

research accumulated in Phase 1 was the

ティス、1970）

basis of Phase 2’s research.
asChristensen,

M.

(1997).

The

Dilemma:

When

New

ClaytonAs mentioned (2)-2, information serving

Innovator'saTechnologies Cause Great Firms tocomplementary

diffusion

innovation

characteristic

a

asset
has

networkpromotingtheFail. Boston: Harvard Business School

strongexternality.
9

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

Press. (玉田俊平太監修/伊豆原弓訳『増利雄訳『イノベーションの普及』翔泳社、補改訂版 イノベーションのジレンマ』

2007）
Teece,

翔泳社、2001)
de Nooy, W., Mrvar, A., and Batagelj, V.

D.

J.

(1987).

ProfitingfromTechnological Innovation: Implications(2005). Exploratory Social NetworkforAnalysisCambridge :Licensing, and Public Policy. In Teece,

Cambridge University Press. (安田雪監

D. J. (ed.), The Competitive Challenge:

訳『Pajek を活用した社会ネット ワー

Strategies for Industrial Innovation

ク分析』、東京電機大学出版局、2009)

and Renewal, pp.185-219. Cambridge,

with

Pajek,

Lave, J., and Wenger, E. (1991). SituatedLearning:

Legitimate

Integration,

Collaboration,

MA: Ballinger（石井淳蔵他訳『競争へのPeripheral

挑戦―革新と再生の戦略―』白桃書房、

Participation, Cambridge University

1988）.
Tsutsui, Mariko (2011). Iyakuhinhukyu no

Press.（佐伯胖訳『状況に埋め込まれた

Chishiki

学習：正統的周辺参加』産業図書、1993）
Moore, G.A. (1991).Crossing the Chasm:

Manejimento

Management in Diffusion Process ofRevised, New York: Harper Business.

Pharmaceutical（川又政治訳『キャズム』翔泳社、2002)

Japan HAKUTO-SHOBO.

Nikkei Medical （ 1999 ） . Special report
Arutsuhaima-byoni(Knowledge

Products).

Tokyo:

Wenger, E., McDermott, R., and Snyder, W.
S. (2002). Cultivating Communities ofKoumyoumie-

hajimeta(Light at the end of the tunnel

Practice,to treat Alzheimer’s disease): 1999/06,

Business Press.（野村恭彦監修/櫻井祐

pp. 76-81.

子訳『コニュニティ・オブ・プラクティ

Rogers,E.

M.

(2003).

DiffusionofBoston,ス』翔泳社、2002）

Innovations, 5th ed., Free Press（三藤

10

MA:

HarvardJournal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

Appendix A
Table of top three keywords
2000～2006（74 papers）
Keyword

Sub Headings

2007～2014（72 papers）
Number

Keyword

Sub Headings

pf time
1st

2nd

Numberpf timegeneric nametherapeutic use

68

Alzheimer

drug therapy

56

of drug A(total

pharmacology

11

Diseasediagnosis

21

90 times)

adverse effects

10( total 110

complications

11

No subheading

1

times)

Prognosis

7

diagnostic imaging

4

radionuclide imaging

3

rehabilitation

2

Radiography

1genetics

1chemically induced

1

therapy1

etiology

1prevention and control

1

therapeutic use

76

adverse effects

20

pharmacology

4

Alzheimer

drug therapy

48

generic

Disease (total

diagnosis

8

name

of

78 times)

radionuclide imaging

8

drug

A

(total 100
times)

3rd

Dementia(totaltimes)

prognosis

6complications

4

diagnostic imaging

3

No subheading1

drug effects

13

treatment

19

outcomecomplications

2

prognosis

2

No subheading1

radionuclide imaging

1

No subheading

25(Received: December 31, 2017)(Accepted: April 15, 2018)11

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

Organizational Design in Modern Firms and the Role of Corporate Management: Relationships of Organizational Change with
Trust and Creative Capacity
Nobuhiko Yamanaka,

Graduate School of Business Administration, Rikkyo University
Japan Academy of Management E-mail: n_yamanaka@rikkyo.ac.jp
Abstract
This study seeks to determine whether employees’ trust in management and the company
itself has any effects on organizational change. In particular, this seeks to reveal its effects onorganizational design changes undertaken in response to a major strategic challenge facing companies today: how to stimulate innovation and creative capacity.
The results of analysis demonstrate that institutional changes in an organization influences employee trust in management, which in turn acts to mediate the effectiveness of organizational changes. Initiatives that involve what this study identified as “comprehensive change”
can raise trust in management, avoiding morale problems and helping companies to unleash
their creative capacity. On the other hand, so-called “cost-cutting, flattening change” risks damaging employee trust in management and can bring about severe morale problems.
These findings suggest the importance of integration in organizational design and emphasize the essential roles for corporate management in the development of healthy social structures and relationships in the businesses.
Key words: Organizational design, morale, complementarity, trust, creative capacity(1) Study Background and Purpose

to attempts to accomplish strategic tasks

Discontinuous change in the modern

more effectively in the face of environmental

business environment has forced many com-

turbulence. Let us assume that businesses to-panies to reconsider their organizational de-day face the dual challenge of how to innovatesign. Initiatives to review traditional organi-in order to generate added value discernible

zational designs and explore new ones areto customers, and how to unleash their organ-spreading in Japanese firms as well. A busi-

ization’s creative capacity to deliver that inno-

ness organization can be understood as an in-vation. In this light, organizational change instrumental system configured to achieve athe modern era can be interpreted as a tech-

unique objective. From this perspective, we

nical challenge: what kind of organizational

can conclude that the institutional transfor-

design(s) should businesses choose to effec-

mations in Japanese firms today correspondtively encourage employees to innovate and to12

Journal of Japanese Management Vol.2, No.2, May 2018

deploy this creative capacity?

ISSN 2189-9592

be defined as “a psychological state compris-

However, business organizations con-ing the intention to accept vulnerability based

sist of two layers, corresponding to their tech-upon positive expectations of the intentions ornical structure and their social structure.

behavior of another” (Rousseau et al., 1998, p.

Businesses can only improve the effectiveness395). Odaka identified “trust” in work col-and efficiency in technical terms by “genuine

leagues, managers, and supervisors as essen-

fostering in their employees a will to work”

tial components of organizational morale

through ensuring “development of healthy so-(Odaka, 1981, pp. 390-391). Accordingly,

cial structures and relationships in the busi-“trust” in an organization and managementness” (Mohri, 1965, p. 21). Viewing organiza-

should be essential for dealing with moraletional design as a mere technical problem lim-

problems associatedits our understanding to only one side of thechange.

withorganizational

story. While organizational design indeed has

Executing organizational changes istechnical aspects, it must also be recognizedassociated with high risk: while the effects are

as a social issue: i.e., how to ensure “develop-

felt throughout the whole firm, there is noment of healthy social structures and rela-guarantee the efforts will be successful. The

tionships in the business” to instill in employ-mere presence of risk can generate anxiety

ees this “will to work”.

and confusion among employees, which inMany problems are known to occur

turn can easily trigger serious morale prob-

during the organizational change process, in-lems. Accordingly, protecting employee mo-cluding decreased willingness to work, unco-rale by promoting coordination and collabora-

operative attitudes, and low morale due to re-tion within the organization in order to im-

sistance or opposition to the change process,prove cohesion is indispensable to the successor simply confusion, among employees andof organizational changes.

managers alike. This paper refers to these in-This means that organizational change

clusively as “morale problems” associateddemands leadership as well, to “offer direction

with organizational change. Dealing with mo-and then motivate others to believe and to fol-rale problems means addressing “social struc-low” (Roberts, 2004, p. 284). Whether leader-tures and relationships in the business”,

ship can succeed or not would seem to depend

which often determine the success or failureon the level of trust employees and managersof organizational changes. Management isalike have in their company and its manage-tasked with the important responsibility ofment personnel. This is because trust in asolving them in their role as the “designers” ofcompany and its management are necessary

an organization (Roberts, 2004, p. 12).

prerequisites to overcoming the morale prob-

In interpersonal relationships, whenlems associated with organizational changes

ensuring the intentions and behavior of otherand ensuring those changes take root, serving

people are appropriate comes with certain

as a basis for the legitimacy of corporate lead-risks and when the achievement of interests

ership and a foundation for their support.

of an individual may depend on another per-Organizational trust is also essential toson, trust is essential in these case. Trust can
13

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

enabling innovation and unleashing the crea-

stimulating innovation and unleashing an or-

tive capacity of a company. Bellah et al. write

ganization’s creative capacity, nor how moralethat “the productivity of a high-tech company

problems associated with these changes re-resides in the quality of its workforce, in thelate to their success or failure.

competence and responsibility of individuals,

One study whose findings bear signifi-

but also, critically, in the trust they have incance on this research topic is that of Inoueeach other to nurture creativity and innova-(2004). Inoue analyzed the so-called “selectiontion”, and that companies need “persons whoand concentration” strategies adopted by Jap-

trust each other and genuinely enjoy working

anese electronics and information-related

together” (Bellah et al., 1991, p. 94). This

companies, and how they were complemented

claim implies that individuals within an or-

by organizational changes such as hierar-

ganization need to form trusting relationships

chical flattening, decentralization of authority,with each other in order for a given organiza-

subcontracting, and departmental consolida-tional design to successfully stimulate its em-tion. He found that measures such as cost-cut-ployees to innovate and unleash their creative

ting, subcontracting, and reductions of busi-

capacity.

ness scale were compatible with the pursuit ofThis study is an attempt to address the“efficiency” (typified by cost-cutting). He also

issues defined above. Namely, it seeks to de-found, however, their efforts to externalize

termine whether employees’ trust in manage-

business and reduce scale acted to inhibit

ment and the company itself has any effects

their “effectiveness” (e.g. in creating market

on organizational change. In particular, itvalue).

seeks to reveal its effects on organizational

One of his observations on companies’

design changes undertaken in response to a“selective withdrawal” in particular is very in-

major strategic challenge facing companies

teresting and relevant to the research prob-

today: how to stimulate innovation and crea-

lem at hand: corporate readiness to external-

tive capacity.

ize business operations actually lowered employee morale, reducing their “commitment(2) Preceding Researchand tenacity to work”, and impeded their abil-

1. Organizational Change and Morale Prob-

ity to solve problems creatively to generate in-lems at Japanese Firms

novative products and services (Inoue, 2004,

Since the 1990s, Japanese firms have102). Inoue’s findings reveal that while mod-attempted to transform their organizational

ern Japanese firms have made considerable

structures in various ways to adapt to rapidchanges to their operational structures, thosechanges in business environments. However,same changes have led to their own inextrica-

few studies have endeavored to clarify the ac-ble problems. At the same time, they suggest

tual results of these transformations, northat morale issues due to certain kinds of or-

their impacts or positive effects. Moreover, itganizational change can hinder companies

is rarely obvious how the organizationalfrom exercising their full creative capacity.

changes in Japanese firms in recent years re-

The present study seeks to investigate suchlate to the modern, strategic challenge of14

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

morale problems from the perspective of or-

be mediated by their trust in management. In

ganizational trust.

his words: “Employees support managerial
behaviors intended to increase shareholder

2. Trust in Japanese Firms

value as their trust in management grows.

Trust has become an interdisciplinary

Conversely, their support for shareholder

topic, with research efforts spanning different

value-centric management falls as their trust

disciplines such as economics, psychology, andin management decreases” (Miyamoto, 2008,

sociology. Japanese organizational research is

pp.99-100). Miyamoto’s

no exception. In one study, Hino focused on

strates that employee attitudes, and particu-

the relationship between “leaders” and “fol-larly their trust in their managers and thelowers” in an organization. Along with deter-

company itself, are important factors to con-mining several factors necessary for the for-sider during management reforms and organ-mation of trust in leaders among followers, heizational changes, as the perspectives of or-revealed that this formation was cruciallyganizational members can crucially impact

necessary for leadership to function (Hino,

their potential for success. Building on this2010). Another study, directly relevant to thisbody of work, the present study hypothesizes

study’s research problem, is that of Tatsu-

that the success and effectiveness of organiza-

michi, who conducted a survey of employees

tional changes intended to facilitate innova-of Japanese firms looking at changes in theirtion and unleash the creative capacity of firms

attitudes towards their company and man-are mediated by trust among members of theagement personnel. Based on the results, heorganization.

researchdemon-

claimed that in the midst of recent reforms inpersonnel systems, that “a ‘chasm’ of some(3) Theoretical Framework and Variable Con-kind seems to have formed between employ-

figuration

ees and their company, and moreover between

The theoretical framework of Whitting-them and management” (Tatsumichi, 2006,

ton and Pettigrew’s “innovative forms of or-

p.285). His findings suggest that the trustingganizing” was adopted to guide this study’s

relationships between employees and theirvariable configuration and analysis. These

companies and managers may have incurredscholars argued that dramatic changes insome damage in Japanese firms as they con-business environments, such as the transition

tinue to evolve and implement organizational

to the globalized economy and the knowledge-changes.

based economy, encouraged modern enter-

The relation between institutional

prises to introduce “innovative forms of or-transformations in Japanese firms and organ-ganizing”. Along with real examples in Euro-izational trust was also analyzed by Miya-pean firms, they showed how different forms

moto: specifically, as the relation between re-

had complementary effects within organiza-

cent corporate governance reforms and em-tions. Their analysis demonstrated how “com-ployee trust. Finding unexpectedly high sup-plementarities” are essential to their success-port among employees for shareholder-ori-

ful introduction, and that companies could

ented governance, Miyamoto attributed it to15

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

suffer harm by failing to achieve mutual com-

For the latter, they would be asked to what

plementarity between disparate organizing

extent their organization produced real, tan-

forms, calling this phenomenon “the dangers

gible creative results. These were both subjec-

of partial change” (Whittington et al., 1999).

tive measures in the sense that their scores

Whittington and Pettigrew’s research pro-depended on the individual perceptions of re-vides us with a useful framework for concep-

spondents: thus, the variables were termed

tualizing and analyzing structural and process changes in modern business organiza-

Subjective Creative Activities and Subjective
Creative Achievements2.

tions, as well as their effects, in a comprehen-

In addition, this study used scale items

sive way.

adopted by Tatsumichi (2006) and Miyamoto

Variables in the present study were(2008) to measure employees’ trust in man-configured to match the dimensional configu-

agement and their organization. Along withration of related research on innovative forms

directly measuring whether or not “manage-of organizing, so as to capture structural andment is trusted”, Tatsumichi’s scale measuresprocess changes in the same framework. To

factors like whether an employee’s “company

operationalize the variables, new scale items

is completely devoted to its employees, even

were created to capture real organizational

when their performance is bad”, and whether

changes underway in Japanese businesses to-“employees are valued”. The scale allows us-

day. The following were set up as organizing

ers to measure employees’ positive expecta-

forms-related variables: hierarchical flattening, strategic decentralization, operational
decentralization, project-based organizational structures, downsizing, IT investment,
communications and systems integration,
strategic restructuring, and outsourcing1.

tions of the intentions and behavior of their

Two other variables, corresponding to(4) Survey Overview and Data Used in Anal-

corporate management, as well as their company overall. Thus, it was incorporated in thepresent study in the variable Trust in Man-

agement3.

creative activities and creative achievements,

ysis

were set up to examine another important

Two approaches were necessary to de-factor: the relationship of organizational

scribe and understand the actual operations

changes with innovation and creative capacity.

of firms in terms of the underlying organiza-

For the former, employees would be asked totional structures and processes controlling

what extent their organization carried out in-them. First, to learn how different individuals

itiatives and efforts aimed at creative results.
1

There is insufficient space to describe the items
composing each variable. Suffice to say, the variables
had sufficiently high internal consistency for analysis
purposes (the lowest reliability coefficient observed
for any variable was 0.793, for “outsourcing”).
2
Subjective Creative Activities consisted of 5 items
such as “My company develops new products andservices ahead of our competitors”, while Subjective

Creative Achievements consisted of 3 items such as“My company has increased the number of new
products and services offered in the past 2 years”.
Their respective reliability coefficients were 0.934
and 0.831.
3
The reliability coefficient of this variable based on
Tatsumichi’s scale ietms was 0.920.
16

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

within organizations perceive those struc-dividuals within their organization. In addi-

tures and processes as ‘social realities’ in theirtion, readers should also keep in mind thatworkplace; second, to determine the percep-

since data about organizational structural

tions and expectations of management, as

characteristics, perceptions of management,

well as an organization itself, by its constitu-

and creative activities and achievements

ent members.

were all collected from the same individuals,

To this end, a survey was administered

the potential for common method bias cannot

to general employees and management per-be completely eliminated.

sonnel employed in different departments in

In total, 300 responses were collected;

a variety of organizations. The survey was ad-

186 were analyzed after excluding individuals

ministered through the internet in January

who responded “Unknown” to questions about2014 to general employees and managerial

the capital and sales of their firm. Comparedpersonnel working at private companies inwith national averages, a somewhat greater

Japan4.

proportion of respondents were employed in

Sampling bias, specifically in terms ofthe manufacturing industry, and a greater

respondent attributes, in a problem that has

proportion at large enterprises (althoughbeen identified with internet surveys, andthere was no shortage of employees of small

could not be avoided in this study. However,

and medium enterprises). Further, many re-

problems have also been noted for conven-spondents worked in sales or R&D depart-tional surveys, such as difficulties in re-ments, and many were clerical workers; how-

trieval: the internet survey methodology was

ever, there also many individuals in profes-

adopted based on a decision to prioritize datasional occupations. Other notable characteris-collection. In addition, the survey was admin-tics of the sample included the fact that overistered to individuals, based on the study’s

40% were senior officials (i.e., designation of

motive of understanding organizational reali-“Chief/Head” or higher), and a somewhat highties from the perspective of individual em-

number over 40 years old.

ployees: this meant sample representative-

The effects of industry type, company

ness was another potential issue with thesize, department, and managerial staff

data. Nevertheless, this method was still(yes/no) were controlled for in analysis by in-deemed suitable for the study, given the dual

serting these factors as control variables.

objectives of determining various organizational members’ perspectives about corporate(5) Analysis Results

management and company overall, and un-

1. Derivation of Organizational Change Pat-

derstanding their ‘organizational realities’ as

terns

the real social environment experienced by in-

Two major characteristics of organiza-

4This survey was conducted as part of a 2009 Strategic Research Foundation Grant-aided Project forPrivate Universities from the Ministry of Education,
Culture, Sports, Science and Technology: Practical

Research on Intelligently Designed Enterprises andOrganizations and Personnel Development Techniques Built by Business Creators.
17

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

tional changes in Japanese firms were appar-

tablishing or closing departments, or reduc-ent based on whether and to what extent eaching the number of management personnel orof the specific organizing forms described

official positions.

above were confirmed by respondents:

However, we know from the work of In-

1) Firms tended to implement changes

oue, Whittington and others that organizing

to a project-based organizational structure,forms are more effective when introduced in a

focusing on company-wide cost reductions

mutually complementary way, rather thanand reviewing their businesses and opera-

separately. Assuming this holds true here, wetions;

can imagine that organizing forms are put2) Firms tended to emphasize rigorous

into practice in certain combinations or ‘units’,review of the responsibilities of operationaland further that these units tend to follow cer-managers, along with information sharing,tain patterns. This study derived these ‘pat-cooperation, and support within the organiza-

terns’ via principal component analysis, in antion. However, they seldom implemented ap-

attempt to determine the major trends under-

proaches such as strategic or operational de-lying institutional transformations in Japan.

centralization, hierarchical flattening, dises-

Two principal components were extrac-

Table 1. PCA Findings for Organizing Forms
Organizing Form Variablehierarchical flattening
strategic decentralization
operational decentralization
project-based organizational structures
downsizing
IT investmentcommunications and systems integration
strategic restructuringoutsourcing

PC1
0.728
0.895
0.848
0.786
0.655
0.796
0.762
0.866
0.596

PC2
0.492
-0.149-0.270-0.2110.599-0.376-0.4770.110
0.578

eigenvalue
percentage of variancecumulative variance5.416
60.17560.1751.456
16.17576.35

ted in the analysis (PC1 and PC2:Table 1).

and outsourcing, but negative loadings for IT

PC1 exhibited high factor loadings andinvestment and communications and systems

positive correlations for all organizing form-

integration. In other words, this change pat-

related variables. Given that all organizing

tern was characterized by the reduction offorms are promoted in a comprehensive man-both business cost and operational scope, with

ner in this change pattern, we can term thisan accompanying increase in external pro-component Comprehensive Change. PC2, on

curement, while failing to maintain invest-

the other hand, showed high factor loadings

ments in IT and efforts at intra-firm integra-

and positive correlations for organizing forms

tion. Accordingly, we can term this component

Cost-cutting, Flattening Change. The above

such as hierarchical flattening, downsizing,18

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

Creative Achievements (Model 4);

analysis revealed the existence of two patterns in organizational changes: Comprehen-3) Independent variables = Compre-

sive Change and Cost-Cutting, Flatteningchange.

hensive Change, Cost-Reducing, Flattening
Change, and Trust in Management; dependent variable = Subjective Creative Activities(Model 3) or Subjective Creative Achievements (Model 5).

2. Relationship of Creative Capacity with Organizational Change and Trust in Management

Three things needed to be shown for
The study next sought to analyze how

the mediating effects of trust in management

firms’ utilization of their creative capacity re-

to be confirmed: in 1), organizational change

lated to these organizational change patterns,

patterns needed to affect trust in manage-and moreover how trust in management af-

ment; in 2), organizational change patterns

fected this relationship. According to our hy-

needed to affect firms’ creative capacity; andpothetical framework outlined above, institu-

in 3), trust in management needed to affectedtional transformations inevitably generate re-firms’ creative capacity, and the effect of or-sistance, confusion, and opposition within an

ganizational change patterns on firms’ crea-organization. However, the present of trust intive capacity needed to be smaller than in 2)

a firm’s management can avoid the conse-(Baron and Kenny, 1986, p.1177).

quent dysfunction and diminished morale, al-

The results for Model 1 in Table 2

lowing these transformations to take hold anddemonstrate that comprehensive change in-

effect. In short, organizational change is pre-creases trust in management, while cost-cut-

sumed to be mediated by trust in manage-ting, flattening change decreases it.

ment, which influences the consequences ofMoreover, trust in management medi-

any institutional change: its effects should be

ated the effects of both types of change pat-

especially strong on organizational changes

tern on both creative activities (Models 2, 3)

aimed at liberating the creative capacity of aand creative achievements (Models 4, 5). Be-

firm.

sides, the value of adjusted R square is higher
The mediating effects of trust in man-in mediation models (Models 3 and 5) than inagement were analyzed according to the pro-models without mediator (Models 2 and 4).

cedure of Baron and Kenny (1986). Several

This suggests that mediation models explain

models were constructed:

the effect of organizational change on firms’

1) Independent variables = Compre-

creative capacity better than otherwise.

hensive Change and Cost-Cutting, Flattening
Change (i.e., their principal componentscores); dependent variable = Trust in Management (Model 1);
2) Independent variables = Comprehensive Change and Cost-Reducing, Flattening Change; dependent variable = Subjective
Creative Activities (Model 2) or Subjective
19

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

Table 2. Mediation Analysis Findings for Trust in Management
Subjective
Creative
Activities

Subjective
Creative
Activities

M odel 1

M odel 2

M odel 3

M odel 4

M odel 5

Dependent
Trust in
Variable M anagement

Subjective
Subjective
Creative
Creative
Achievements Achievements

Comprehensive
ChangeCost-cutting,
Flattening
ChangeTrust inM anagement.587**.583**.365**.538**.271**-.452**-.278**-.102-.199**

.016

R^2

.647

.532

.591

.479

.562

Adj. R^2

.563

.418

.486

.354

.451

F value

7.687**

4.693**

5.633**

3.829**

5.055**

1.141-2.403

1.127-2.803

1.126-2.380

1.130-2.834

155

153

156

154

.374**

VIF 1.123-2.419
N

157.457**† p < .1, * p < .05, ** p < .01(6) Conclusions and Future Challenges

if the change embodies certain specific char-

The study findings demonstrate that

acteristics, confidence in management will beinstitutional changes in an organization influ-

strengthened, and the effects of the changeences employee trust in management, which

potentiated. Along with alluding to the im-in turn acts to mediate the effectiveness of

portance of integration in organizational de-these changes. Initiatives that involve whatsign—the big-picture perspective that takes

comprehensive

into account the entire situation of an enter-change—i.e., promoting intra-firm integra-

prise—the findings suggest that the develop-

tion, decentralization, and IT investment
alongside flattening and outsourcing—canment of healthy social structures within businesses serve to complement and effectuate in-raise trust in management, avoiding morale

stitutional changes. Corporate management

problems and helping companies to unleash

shoulder essential roles in the task of design-

their creative capacity. Whereas, so-called

ing an organization: they must not only foster

cost-cutting, flattening change risks damag-

trust in management among company em-

ing employee trust in management and canployees, but also ensure the development ofbring about severe morale problems. Put an-

healthy social structures and relationships

other way, the consequences of an institu-

within the firm, which can serve as a founda-

tional change seem to depend on the contentstion for smooth collaboration. This fact mustof the change itself. Poorly configured change

be acknowledged today anew.

this

study

identified

ascan damage trust in management, and trigger

This study nonetheless has a few limi-

resistance, confusion, and the loss of working

tations. For one, “trust”, “morale”, and othermotivation within an organization. However,constructs fundamental to the study hypothe20

Journal of Japanese Management Vol.2, No.2, May 2018ISSN 2189-9592

sis were not directly measured or analyzed.

Hino, K. (2010). Leadership to Follower Appro-

New theoretical and empirical investigations

ach (Leadership and Follower Approach).

of these constructs are necessary. Second, me-

Bunshindo.

diation analysis does not reveal anything

Inoue, T. (2004). ‘Sentaku to shuchu’ to kigyo

about the cause-effect relationship of a phe-soshiki: saihen pattern 4 ruikei nonomenon. Case studies and other methods

kenshutsu (‘Selection and Concentration’should be adopted to help elucidate the cau-and Corporate Organization - Four Types

sality of the relationships identified here.

of Reorganization Patterns). In: Sentaku

Third, the survey methodology meant thatto shuchu: nihon no denki/ jouhou kanren

sample representativeness could not be en-

kigyou ni okeru jittai bunseki (Selection

sured, and common method bias could not be

and Concentration: An Empirical Analy-

controlled for. Additionally, the priority placed

sis of Electronics and Information Tech-on effective data collection was inextricably

nology Firms in Japan), T. Tsuru, Japa-

associated with limitations on the data avail-nese Electrical Electronic & Information

able for analysis, suggesting the study

Union (Eds.). Yuhikaku. pp. 53-104.

method could use improvement. Readers

Miyamoto, M. (2008). Nihon no jugyoin ha nazeshould proceed with caution to avoid general-kabunushijushi no corporate governanceizing the study findings in an over-simplistic

wo shiji surunoka (Why do Japan’s Em-

way. New investigations should be conductedployees Support Shareholder-oriented

to improve on this study’s weaknesses andCorporatevalidate its findings.

touchi bunseki no Frontier (Frontiers in

Governance?).

Corporate GovernanceAcknowledgments

In:

KigyouAnalysis),H.

Miyajima (Ed.). Nippon Hyoron sha. pp.

I would like to express my gratitude to

84-111.

the anonymous reviewers for careful reading

Mohri, S. (1965). Keieikanri soron (Generaland informative comments. I also would like to

Theory in Business Administration), 2ndshow my gratitude to the president, directors

Ed. Chikura Shobō.
Odaka, K. (1981). Sangyo shakaigaku kougi

and colleagues of Japan Academy of Management for the academic support.

(Lectureson

Industrial

Sociology).

Iwanami Shoten.
Roberts, J. (2004). The Modern Firm: Organiza-

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(Received: December 29, 2018)(Accepted: March 15, 2018)22

Regulation FD, Analysts’ Information Acquisition, and the
Public Goods Problem
Manabu Kotani

Faculty of Commerce, Kumamoto Gakuen University
Japan Accounting Association
E-mail: kotani@kumagaku.ac.jp

Abstract
Analysts collect their own information to improve the precision of theirearnings forecast. However, once the Regulation Fair Disclosure (FD) takes effectand information includes the aspect of public goods, individual analysts are
expected to begin free-riding on information acquired by other analysts. This paper
develops a model in which analysts decide whether or not to collect costly
information, and an investor predicts earnings based on the analysts’ behavior. The
findings of this paper include, under Regulation FD, as the number of analysts
grows, the motivation to collect information becomes weaker, and analysts depend
on public information only. Further, without Regulation FD, an increase in thenumber of analysts has a nonnegative effect on the investor ’s predictive ability.
Finally, under Regulation FD, the investor ’s predictive ability is at a low levelcompared to a case without the Regulation. It is noteworthy that Reg FD, which
intends to improve the information environment surrounding security market
participants, has these unintended consequences.
Keywords
Earnings forecast, Forecast accuracy, Regulation FD, Free-rider, Public
information(1) Introduction
Mitigation
asymmetrysts without simultaneously disclosing
of

among

the

information

security

the same information to the public. As amarketresult, enactment of Reg FD has banned

participants is seen as major purpose of

so-called

disclosure regulation. The Regulation

comprises that firms transmit material

Fair Disclosure (hereafter “Reg FD”),

information

which was enacted in 2000 in theparticipants. Further, a regulation with

United States, prohibits firms fromthe same effect as Reg FD will beprivately

introduced in Japan in the near future.

disclosing

important

information to select investors or analy-

The
23

selective

purposedisclosure,

only

of

to

this

which

particular

paper

is

to

investigate the effect of Reg FD on

representative

analysts’ information acquisition andfollowing. First, if the firm discloses

the investor ’s predictive ability.

information to all players (two analysts

There

are

abundant

prior

and

an

investor,

investor),

revealsantheinformation

researches that empirically inquire howcascade will arise among them so that

Reg FD affected analysts and investors.

the investor ’s predictive ability will

Concerning analysts, enactment of Reg

worsen. Second, if the information is

FD has (1) increased (or decreased) theoffered to only one analyst (in othernumber of analysts who follow the firmwords,(Irani and Karamanou 2003; Mohanram

disclosure), cascade formation may be

and Sunder 2006; Gomes et al. 2007 );restrained and the investor is better off.

(2)

Lastly, under Reg FD, the firm may

rendered

analysts’

informationacquisition

active(orinactive)(MohanramandSunderdecide

2006;

the

not

firm

to

issuesdiscloseaselective

information

intentionally in order to improve theJanakiraman et al. 2007; Mensah andinvestor ’s predictive ability.

Yang 2008; Kross and Suk 2012; Hahn

The work of Arya et al. (2005) isand Song 2013); and (3) improved (orclosely related to this paper.

worsened) the precision of analysts’

studies pay attention to the nature of

forecasts(Irani and Karamanou 2003;

the influence of Reg FD on analysts and

Heflin et al. 2003; Bailey et al. 2003;

investors. They differ in the following

Agrawal et al. 2006; Francis et al. 2006;

point: Arya et al. (2005) is concerned

Mohanram and Sunder 2006; Gomes etwith the information cascade caused byal. 2007; Srinidhi et al. 2009; Kross and

Reg FD, while this study focuses on a

Suk 2012). With respect to investors,

particular phenomenon, namely thatenactment of Reg FD has (1) changed

Reg FD renders information a public(orinformation

good. Therefore, Arya et al. (2005) see

environment (Heflin et al. 2003; Francis

analysts as rational decision-makers,

et al. 2006; Ahmed and Schneible 2007 )but they do not consider the strategicandinteractions of analysts. On the othernotchanged)

(2)

their

reducedinformation(or

expanded)
among

hand,

2004;

strategic agents who rationally expect

Chiyachantana et al. 2004; Gomes et al.

other agents’ incentive. In particular,

2007; Sidhu et al. 2008; Duarte et al.

the2008; Chen et al. 2010). These priormotivation of analysts to be free-riders

studies do not necessarily come to thein information collection. In general,same conclusion. On the contrary, somemost firms are covered by multiple

opposing results are presented.

analysts. Therefore, to gain deeper

investors

asymmetry(Eleswarapu

et

al.

this

study

study

pays

sees

Both

analysts

attention

to

as

the

Arya et al. (2005) investigate Reg

insight into analysts’ decision-making,

FD analytically. Their model, whicha study of their behavior in the presence

includestwo

analystsandaof rivals is needed. As mentioned above,24

a model is developed to examine theinfluenceofReg

informationFDonanalysts’(private) information (or signals) with

and

the

an effort from manager, and 𝑐𝑖 denotes

ability,while

the cost of effort incurred by analyst 𝑖.

taking analysts’ strategies into account.

Assume that signal 𝑥̃ is represented

investor ’s

collection

Analysts can extract additional

predictive

The paper is organized as follows.
Section2

presents

the

model

by:

and

𝑥̃ = 𝜃̃ + 𝜀̃,derives an equilibrium. Section 3 shows
the comparative statics and discusses

where 𝜀̃ represents the prediction errorand 𝜀̃~𝑁(0, 1⁄𝛽 ). One of the examples of

the case where Reg FD is not enforced.

𝑥̃ is the manager ’s own prospect, which

Section 4 concludes.

is not expressed in the management
forecast. To avoid being pursued as(2) Model

responsible for the wrong prediction,

There

are

representative
forecasting

analysts𝑛

investor

the

and

who

firm’sathis study assumes that the manager

arewill not venture to release his prospect

forthcoming

voluntarily.

However,

if

he

is

earnings. The variable 𝑛 is a positive

interviewed by analysts, he will reveal

integerThe

it in a passive manner. The cost offorthcoming earnings of the firm, which

acquiring 𝑥̃, which is dependent on theare denoted by 𝜃, are the realization ofa random variable 𝜃̃ , where 𝜃̃ ~𝑁(0, 1⁄𝜔 ).

ability to extract information from theNote

Suppose that each analyst observes his

and

that

larger

tilde

than

(“~”)

one.

represents

manager,arandom variable.
All

analysts

differs

among

analysts.

𝑐𝑖 , but cannot know another analyst’s
and

the

investor

cost.

He

only

knows

that

anotherobtain public information (or signals) 𝑦̃analyst’s cost is a random variable that

released by the firm at no charge.

isAssume that public information 𝑦̃ is

Meanwhile, the investor does not haverepresented by:access to a manager, and he cannot
obtain 𝑥̃ on his own. Assume that 𝜃̃ ，𝜂̃，𝑦̃ = 𝜃̃ + 𝜂̃,
whereuniformly

distributed

in[0,1]. 1

represents the prediction
error and 𝜂̃~𝑁(0, 1⁄𝛼 ). Managers’ initialand 𝜀̃ are mutually independent. 2

earnings forecast, which is made public

behavior is considered. According to the(so-calledso-called projection theorem, an analyst,

𝜂̃“management

To

forecast”),

begin

with,

the

analysts’

illustrates 𝑦̃.

who has observed 𝑦 and 𝑥, will expect

Because there is no reason to specify the
distribution of 𝑐𝑖 a priori, it is assumed that 𝑐𝑖
distributes uniformly on [0,1]. Alternatively,
even if the distribution function of 𝑐𝑖 isassumed to be a monotone increasing functionthat is continuous on [0,1], the main results(except for Corollary 1) remain unchanged. For
convenience, it is assumed that 𝑐𝑖 is a

uniformly distributed random variable on [0,1].
2 Due to the release of signals 𝑦 or 𝑥, a firm
may incur proprietary cost s. However, thedecision-making of disclosure by firms isbeyond the scope of this work, since proprietary
cost is not considered in this model.

125

where Π（ ≥ 0）represents a fixed rewardthat 𝜃̃ is represented by:E(𝜃̃ |𝑦, 𝑥) =
In

this

case,

prediction

𝛼𝑦 + 𝛽𝑥
𝜔+𝛼+𝛽

the

error

varianceisfor analysts, 𝑎𝑖 represents estimates(1)

submitted by the analyst, and 𝑐𝑖 is the

of

the

cost of acquiring 𝑥̃. 5 In contrast, whenrepresentedbyan analyst 𝑖 does not collect 𝑥 , the1⁄(𝜔 + 𝛼 + 𝛽) . In contrast, when an
analystdoes

notcollect

payoff is denoted as follows:
𝑈𝑖 = Π − (𝑎𝑖 − 𝜃)2additional

information, he can observe only 𝑦, andhis

conditional

expectation

As stated above, when an analyst
observes {𝑦, 𝑥} , then 𝑎𝑖 = E(𝜃̃ |𝑦, 𝑥) .

isrepresented by:E(𝜃̃ |𝑦) =𝛼𝑦𝜔+𝛼Further, when he observes {𝑦} , then𝑎𝑖 = E(𝜃̃ |𝑦). Therefore, in each case, the(2)expected

The variance of the prediction error issimultaneously,

theirforecast

but

without

𝑥 to other analysts are prohibited. 3 In
isassumedanalystreveals

his

that

as

(5)

2
E𝑈𝑖 = E [Π − {E(𝜃̃ |𝑦) − 𝜃} ]paper, it is assumed that sales of signal
itrepresented

1
=Π−
− 𝑐𝑖
𝜔+𝛼+𝛽

communication among them. In thisaddition,is2
E𝑈𝑖 = E [Π − {E(𝜃̃ |𝑦, 𝑥) − 𝜃} − 𝑐𝑖 ]after the formation of expectation, thereleasepayofffollows:

represented by 1⁄(𝜔 + 𝛼). Assume that,analysts

(4)

1
=Π−
𝜔+𝛼

each

expectation(6)

Π − 1⁄(𝜔 + 𝛼 + 𝛽) of equation (5) can betruthfully and without garbling.

interpreted as the reputation that an

Based on prior studies (Laster et al.

analyst gains in the capital market. The

1999; Lim 2001; Morgan and Stocken

remaining amount after deducting 𝑐𝑖 is

2003;

Kameda et al. 2011), the analyst’s

analyst 𝑖’s expected payoff. Meanwhile,Π − 1⁄(𝜔 + 𝛼) of equation (6) shows that,

payoff function is represented. 4 When

if the analyst does not collect signal 𝑥,

an analyst 𝑖 collects signal 𝑥 , his

his reputation declines, but the cost of

payoff is denoted as follows:
𝑈𝑖 = Π − (𝑎𝑖 − 𝜃)2 − 𝑐𝑖information gathering is saved.

FischerandStocken

2010;

(3)

Now consider the behavior of a

The assumption that sales of signal 𝑥 toother analysts is prohibited is based on thefollowing. There are various rules that require
financial institutions to build information
barriers.
For example, to prevent premature leakage ofmarket-moving information, several SEC andstock exchange rules mandate that the Chinese
Wall be set up as an imaginary barrier between
the investment banking, corporate finance, andresearch departments of a brokerage house, andthe sales and trading departments ( Downes andGoodman 2014). As long as these information

barriers exist, transactions of signal 𝑥 among
analysts seem impossible to carry out.
4 These prior researches consider forecasters’
incentive to minimize forecast error byincorporating the quadratic loss term into theirutility function.
5 Unlike the investor, analysts may have aninterview with managers. In that case, it isassumed that information acquisition cost isincurred to constant Π. However, none of theconclusions are changed on the assumption thatΠ = 0.

326

representative investor. The investor ’s
objective is to maximize the precision of

based on analysts’ forecasts. In the final
stage, the realization of 𝜃̃ (and 𝑥 if

the forecast, and the analyst’s forecast

manager offered) are disclosed. In thiscan be utilized at the prediction ofgame, once analysts decide whether orforthcoming earnings. Therefore, thenot to collect 𝑥 during the first stage,investor’s action is described as follows.
When all analysts submit 𝛼𝑦⁄(𝜔 + 𝛼) as

analysts and the investor do not face

their forecast, the investor adopts𝛼𝑦⁄(𝜔 + 𝛼) as forecast. In contrast,

make decisions strategically. Therefore,

when an estimate that is different from𝛼𝑦⁄(𝜔 + 𝛼) is submitted by at least one

making during the first stage.

analyst, the investor adopts the value,

where Reg FD is in force. 6 Under Reg

forbelow.

FD, selective disclosure by the firm isKnowledge about signal 𝑦 raises theinvestor’s expectation that E(𝜃̃ |𝑦) =prohibited. Hence, if a firm provides

𝛼𝑦⁄(𝜔 + 𝛼). Therefore, when the investor

participants,

observes that the analyst’s forecast issimultaneously release the information

equal

investor

to the public. In other words, if at least

conjectures that the analyst does not

one analyst extracts signal 𝑥 with aknow signal 𝑥. On the other hand, when

cost, other analysts can simultaneously

the analyst’s forecast is not equal toacquire 𝑥 without a cost. Therefore,𝛼𝑦⁄(𝜔 + 𝛼), the investor guesses that thethe information set is {𝑦, 𝑥} for eachanalyst does know signal 𝑥 , unlike
himself. As a result, the precision of theanalyst, and his estimated results are(𝛼𝑦 + 𝛽𝑥)⁄(𝜔 + 𝛼 + 𝛽). On the other hand,investor’s forecast is 𝜔 + 𝛼 when all ofwhen

the analysts submit 𝛼𝑦⁄(𝜔 + 𝛼), and isanalyst’s information set is {𝑦} and theestimate is 𝛼𝑦⁄(𝜔 + 𝛼). Now, under Reg

thereasontooutlined𝛼𝑦⁄(𝜔 + 𝛼) ,thethe situation afterwards where they
this study focuses on analysts’ decisionHereafter, the case is consideredinformation

𝜔 + 𝛼 + 𝛽 when at least one analyst

no

to

one

particular
the

firm

acquires𝑥 ,marketmust

every

submits the forecast different from𝛼𝑦⁄(𝜔 + 𝛼).

FD, the investor comes to know the

There are four stages in this game.

information disadvantage over analysts

the𝑖disappears. Therefore, note that theobserves 𝑐𝑖 and decides whether toanalyst’s forecast can no longer havecollect signal 𝑥 or not. In the second

information content, and it becomesstage, analysts simultaneously release

redundant for the investor under Reg

forecasts

FD.

In

first

by

stage,eachrelyinganalystonsame information as analysts, and an

publicinformation 𝑦 (and signal 𝑥 if it had

An expected payoff of analyst 𝑖 isbeen collected). In the third stage, thestudied in three different cases. First,

investor expects forthcoming earnings

when analyst 𝑖 collects signal 𝑥 by

6

The case where Reg FD is not enforced isinvestigated in Section 3.
27

which each type 𝑐𝑖 , with 𝑐𝑖 ≤ 𝑐 ∗ ,acquires 𝑥 , whereas other types 𝑐𝑖,

himself, the expected payoff is denoted
as equation (5). Second, if not onlywith 𝑐𝑖 > 𝑐 ∗ , do not acquire 𝑥 . 7 In
addition, there exists a unique 𝑐 ∗ ∈(0, 1) that satisfies the following
equation:analyst 𝑖 but also any other analysts
do not collect signal 𝑥 , the expected
payoff is represented by equation (6).
Lastly, suppose that analyst 𝑖 does notcollect signal 𝑥 but that someone else

(1 − 𝑐 ∗ )𝑛−1
− (𝜔 + 𝛼 + 𝛽)(𝜔 + 𝛼)𝛽 −1𝑐∗collects it. In other words, suppose thatanalyst 𝑖 free-rides on others. Then,

(8)

=0

the expected payoff is represented by:
E𝑈𝑖 = Π −1
𝜔+𝛼+𝛽[Proof] All proofs are described in the(7)

Appendix.

Free-riding on others makes it possible
for an analyst to improve his reputation
without

theinformationdifficult to solve for 𝑐 ∗ explicitly withgathering. Consequently, the expected𝑛 ≥ 3. However, the implicit function

payoff of equation (7) is higher thantheorem shows the behavior of 𝑐 ∗ . In

that of equation (5).

theDuring

cost

the

of

As shown in equation (8), it is

firststage,

each

next

section,the

resultofcomparative statics that focus on theanalyst 𝑖 conjectures other analysts’

threshold 𝑐 ∗ is shown.

actions and decides whether or not tocollect

signal𝑥 . In this game, if(3) Analysis

even just one analyst acquires signal 𝑥,

1.

each

Acquisition

analyst’s payoff will

However,

costonInformation

The following Proposition statesacquisition generates the incentive to

how parameters (such as 𝑛， 𝜔， 𝛼 andbe𝛽free-riderofImpactinformationatheincrease.

The

among

analysts.

Hereafter, the Bayesian Nash equilibria,)

affectanalysts’

informationacquisition.

consisting of symmetric pure strategies
𝑐𝑖 ≤ 𝑐 ∗ ,Proposition 1 The sign of the partial

acquires 𝑥 , whereas every other typederivative of 𝑐 ∗ with respect to each of
the parameters is represented by:in which each type 𝑐𝑖 , with
does

not

acquire𝑥 ,issolved.

Consequently, the following Lemma is

𝜕𝑐 ∗
< 0，
𝜕𝑛

obtained.

𝜕𝑐 ∗
< 0，
𝜕𝜔

𝜕𝑐 ∗
< 0，
𝜕𝛼

𝜕𝑐 ∗
> 0.
𝜕𝛽

Lemma The Bayesian Nash equilibrium

We can interpret the result ofin this game is the pair of strategies in

Proposition 1 as follows. First, theIn the case of 𝑐𝑖 = 𝑐 ∗ , it is indifferent in termsof expected payoff whether or not to acquiresignal 𝑥. In that case, the model assumes thatanalysts acquire signal 𝑥.

728reasonwhy

theis that an increase in 𝛽 enhances thelarger 𝑛 becomes, the more analysts

attractiveness of signal 𝑥 , and hence

rely

the

on

𝜕𝑐 ∗ ⁄𝜕𝑛 < 0

is

that

other analysts’ informationcollection.

In

other

words,

thetolerable

level

of

the

cost

of

information

gathering

motivation to be a free-rider arises

Consequently,

theamong analysts, and the tolerable level

information activates analysts’of the cost of information gatheringcollection. In that sense, the effect of 𝛽declines. Therefore, an increase of 𝑛

is in contrast to that of 𝛼.

8increases.
qualityofleads analysts to neglect to extract
information from the manager, so that2.

analysts become dependent on public

Predictive Ability

information only. 9

The

ImpactontheInvestor ’s

The discussions are now extended𝜕𝑐 ∗ ⁄𝜕𝜔 < 0Second, the reason why

to investigate the impact of parameters

is shown below. The payoff difference

on the investor ’s predictive ability. It is

between collecting and not collecting

evident that his predictive ability is

information

dependent

reducesas𝜔

becomesonanalysts’

information

large. Consequently, the incentive toacquisition behavior. If all analysts do

acquire 𝑥 in exchange for 𝑐𝑖 weakens.
In other words, analysts cease to gather

not collect 𝑥, then the investor accepts
the analyst forecast 𝛼𝑦⁄(𝜔 + 𝛼) as

additional information as the volatility

estimate, or predicts by himself, basedof earnings decreases.

on signal 𝑦. Consequently, the precision

Third, the reason why 𝜕𝑐 ∗ ⁄𝜕𝛼 < 0of the prediction results in 𝜔 + 𝛼. On

is that an increase in 𝛼 reduces thethe other hand, if at least one analyst

payoff difference between collecting andcollects 𝑥 ,then the investor accepts

not

the

analystcollecting

information,

so

that

forecast

analysts lose the motivation to collect(𝛼𝑦 + 𝛽𝑥)⁄(𝜔 + 𝛼 + 𝛽)

information. Accordingly, if sufficiently

predicts by himself, based on signals 𝑦precisebecomesand 𝑥 . Hence, the precision of theinformation

prediction increases to 𝜔 + 𝛼 + 𝛽 . The

acquisition by analysts will be crowded

probability that all analysts do notcollect 𝑥 is (1 − 𝑐 ∗ )𝑛 , and the

publicavailable,

information

additional

out. Thus, an increase in the value ofparameters (such as 𝑛 ， 𝜔 ,and 𝛼 )

asestimate,orforprobability that at least one analyst
collects 𝑥 is 1 − (1 − 𝑐 ∗ )𝑛 . Then the ex-

information gathering, and increases

ante expected precision of the forecast

their dependence on public information.

is represented by:weakens

analysts’

incentive

Finally, the reason why 𝜕𝑐 ∗ ⁄𝜕𝛽 > 0Intrinsically, 𝑛 is an integer. However, forconvenience, it is assumed here to be a real
number.
9 In contrast, Frankel and Li（ 2004）show that,as the number of analysts covering a firm grows,

confidential
information
leaks
out
and
information asymmetry between insiders andinvestors diminishes.

829

reduces 𝑔 due to the reduction of 𝑐 ∗ .

(1 − 𝑐 ∗ )𝑛 × (𝜔 + 𝛼) + {1 − (1 − 𝑐 ∗ )𝑛 }Here,× (𝜔 + 𝛼 + 𝛽)

it

is

shown

that

a

set

of

The above function can be rearranged to𝜔 + 𝛼 + 𝛽 − 𝛽(1 − 𝑐 ∗ )𝑛 . Let it be function

parameters
existsthat
satisfies𝜕𝑔⁄𝜕𝛼 < 0. For example, let 𝑛 = 2, 𝜔 =𝑔. Hereafter, this study inquires how

0.5 , 𝛼 = 1 ,and 𝛽 = 4 .

an increase in 𝑛 affects the value of 𝑔.

parameter
values,and𝜕𝑔⁄𝜕𝛼 = −0.187. If the firm controls 𝛼 toCorollary 1 The sign of 𝜕𝑔⁄𝜕𝑛 depends

increase 𝑔, then the firm must reduceon the value of threshold.
∗
Specifically, when 𝑐 > 1⁄2 , then𝜕𝑔⁄𝜕𝑛 < 0 is satisfied. When 𝑐 ∗ = 1⁄2 ,rather than increase 𝛼 in this case.

then 𝜕𝑔⁄𝜕𝑛 = 0 holds.
when 𝑐 ∗ < 1⁄2 , theninformation leads to improved decision-

For

these

𝑐 ∗ = 0.327𝑐∗This result disputes the conventional
view

In

addition,
𝜕𝑔⁄𝜕𝑛 > 0 is

that

high

qualitypublicmaking by investors. Thus, under Reg

satisfied.

FD, as the quality of public information
improves, analysts’ incentive to collect

As stated above, the effect of 𝑛 on

additional information becomes weaker,𝑐∗.

and the investor ’s predictive ability

𝑔 varies depending on the value of

When 𝑐 ∗ is high or, in other words,

may decline.
Lastly, the partial derivative of 𝑔when analysts’ motivation to collectadditional information is weak, thewith respect to 𝛽 is represented by:value of 𝑔 decreases in response to the𝜕𝑔= 1 − (1 − 𝑐 ∗ )𝑛𝜕𝛽

growth of 𝑛. The growth of 𝑛 has a twosided effect. The one is negative: the+ 𝛽𝑛(1 − 𝑐 ∗ )𝑛−1

growth of 𝑛 lowers 𝑔, because analysts’
incentive to collect information will be

𝜕𝑐 ∗
𝜕𝛽

(10)

>0

dampened. Another is positive: theTherefore, the quality of signal 𝑥 is

growth of 𝑛 increases 𝑔 , because thepositively correlated with the value ofpossibility that at least one analyst

𝑔. The improvement of 𝛽 increases 𝑔collects𝑥

increases.

thenot only directly, but also indirectly

threshold𝑐∗is high, the negative effectthrough an increase in the probabilityWhenoutweighs the positive effect. 10that signal 𝑥 is acquired.

Next, the partial derivative of 𝑔with respect to 𝛼 is represented by;𝜕𝑐 ∗𝜕𝑔
= 1 + 𝛽𝑛(1 − 𝑐 ∗ )𝑛−1𝜕𝛼𝜕𝛼The sign of𝜕𝑔⁄𝜕𝛼becauseincreasean

3. The Case where Reg FD is not
Enforced(9)

So far, the case where Reg FD is in

is not definite,inforce has been considered. Next, thedirectlycase where Reg FD is not enforced isincreases 𝑔 , while an increase in 𝛼

considered, and the difference between𝛼Now, 𝑐 ∗ = 1⁄2 represents the mean of theprobability function of 𝑐𝑖 .
1030

the cases is illustrated. In the absence

predictive ability. As described in 3. 2,of Reg FD, an analyst cannot free -ride

an increase in 𝑛 has both positive andon other’s information, because signal

negative effects under Reg FD. On the𝑥 is not shared by analysts. Hence,other

analyst 𝑖 collects 𝑥 only if the value of

enforced, an increase in 𝑛 does notequation (5) equals or exceeds that of

bring(6). This condition can be simplified as

Accordingly,

follows:

increase in the number of analysts has𝑐𝑖 ≤𝛽(𝜔 + 𝛼)(𝜔 + 𝛼 + 𝛽)threshold

of

cost

when

about

a

Reg

FD

is

negative

withoutRegnoteffect.
anFD,a nonnegative effect on the investor ’s(11)

predictive ability.
Lastly, the following Proposition

The right-hand side of equation (11)denotes thehand,evaluates Reg FD based on the investor’sthatdetermines an analyst’s action. 11 Let

perspective.

the threshold be 𝑘 ∗ . It is clear that 𝑘 ∗is independent of 𝑛. That is, when Reg

Proposition 2 With respect to the ex-

FD is not enforced, the number of rivals

ante expected precision of the investor’s
forecast, 𝑔 < ℎ is satisfied.

is irrelevant to the analyst’s decisionmaking.
Now, define an expected precision

Thus, in terms of expectation, Reg FDof the investor ’s forecast as function ℎ.

reduces the precision of the investor ’sThen, the following Corollary is derived.

forecast. The reason for this is that 𝑐 ∗ < 𝑘 ∗or, in other words, Reg FD undermines

Corollary 2 Suppose that Reg FD is notanalysts’ incentive to collect information. It𝑘∗ ≥ 1 ,enforced. Ifℎ = 𝜔 + 𝛼 + 𝛽 holds
regardless of 𝑛 . Meanwhile, if 𝑘 ∗ < 1 ,is𝜕ℎ⁄𝜕𝑛 > 0 is satisfied,𝛽 ⁄[(𝜔 + 𝛼)(𝜔 + 𝛼 + 𝛽)].

environment

where

noteworthy that

Reg

FD,

which

intends to improve the information𝑘∗ =marketsurrounding

participants,

security

has

these

unintended consequences.
Thus,

ℎ

is

a

constant

function

independent of 𝑛 , or an increasing(4) Conclusion

function of 𝑛. That is, in the absence of
Reg

FD,

an

increase

mightwhich analysts, who observed public

increase ℎ, but it will never reduce ℎ.

information, decide whether or not to

In contrast, Corollary 1 states that,collect costly information. Under Reg FD,

under Reg FD, an increase in 𝑛 may

which prohibits selective disclosure, when areducefirm

𝑔 . Hence,

the

of

This paper develops a model in𝑛presenceorprovidesabsence of Reg FD brings about aparticularsignificant difference in the investor ’s

release11

In the case of 𝑐𝑖 = 𝛽 ⁄[(𝜔 + 𝛼)(𝜔 + 𝛼 + 𝛽)], it is31

information

analyst,thethe

information

to

a

firm

must

to

other

assumed that analysts acquire signal 𝑥.

analysts at the same time. Hence,studies are required to clarify these

individual analysts have the incentive

considerations.

to free-ride on information acquired by

Acknowledgement

other analysts, rather than to collect by

The financial support of Kumamotothemselves.

GakuenThe findings of this paper include,
under

Regulation

numberofmotivationFD,

analysts
to

that

as

grows,

collect

University

isgratefully

acknowledged.

the
their

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Kross, W., and I. Suk. (2012). Does

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Differentialon

Effects

ofShort-

andForecasts.

Laster, D., Bennett, P., and I. Geoum.
(1999).

Rational

Bias

Macroeconomic

inAppendix

Forecasts.

Proof of Lemma

Quarterly Journal of Economics,

It is assumed that any analyst 𝑖

114 (1), pp.293-318.
Lim,

T.

(2001).

adopts a strategy in which he collects 𝑥
andonly if 𝑐𝑖 ≤ 𝑐 ∗ . Suppose that analyst 𝑖Thedoes not acquire signal 𝑥. In addition,

Journal of Finance, 56(1), pp.369-

suppose that other analysts do not385.

acquire signal 𝑥 . Then, a value of

Analysts'

Rationality

Forecast

Bias.

Mensah, Y., and R. Yang. (2008). An

multiplying occurrence probabilities of

Empirical Evaluation of Analysts’

the event by analyst 𝑖’s expected payoff

Herding

is represented by:

Behavior

Following

Fair

Disclosure.

Regulation(1 − 𝑐 ∗ )𝑛−1 × (Π −

1
)
𝜔+𝛼

Journal of Accounting and Public
Policy, 27 (4), pp.317-338.

Next, suppose that analyst 𝑖 does not

Mohanram, P., and S. Sunder. (2006).

acquire 𝑥 , but at least one analyst

How Has Regulation FD Affectedacquires 𝑥. Then, a value of multiplying

theoccurrence probabilities of the event by

Operations

Analysts?

AccountingofFinancialContemporary
Research, 23 (2),analystexpected{1 − (1 − 𝑐 ∗ )𝑛−1 } × (Π −Morgan, J., and P. Stocken. (2003). An
of’spayoffisrepresented by:

pp.491-525.
Analysis

𝑖

1
)
𝜔+𝛼+𝛽

Stock

Lastly, suppose that analyst 𝑖 acquires

Recommendations.

RAND

𝑥 by himself. Then his expected payoff

Journal34(1),

is represented by:ofThe
Economics,

pp.183-203.

Π−Osborne, M. (2009). An Introduction to

1
− 𝑐𝑖
𝜔+𝛼+𝛽

Game Theory: International ed.

Hereafter, I 𝑐 ∗ is solved for using

N.Y.: Oxford University Press Inc.

the same procedures as Osborne (2009,p.290). For any

Sidhu, B., T. Smith, R. Whaley, and R.
Willis.

(2008).

Regulation

Fair𝑖 , if𝑐𝑖 ≥ 𝑐 ∗ , thefollowing inequality is satisfied:Disclosure and the Cost of Adverse34

(1 − 𝑐 ∗ )𝑛−1 × (Π −Let the left-hand side of equation

1
)
𝜔+𝛼

(8) be function 𝑓 . Then 𝑐 ∗ of 𝑓 is afunction implicitly represented by 𝑛，𝜔，

+ {1 − (1 − 𝑐 ∗)𝑛−1 }× (Π −≥ Π−𝛼, and 𝛽. Therefore, from the implicit

(12)

1
)
𝜔+𝛼+𝛽

functioninequality is satisfied:

=

1
)
𝜔+𝛼

+ {1 − (1 − 𝑐× (Π −
≤ Π−

(13)

1
)
𝜔+𝛼+𝛽

=−

the

𝛽 −1 (2𝜔 + 2𝛼 + 𝛽)(𝑛 − 1)(1 − 𝑐 ∗ )𝑛−2 (𝑐 ∗ )−1 + (1 − 𝑐 ∗ )𝑛−1 (𝑐 ∗ )−2

1
)
𝜔+𝛼

=−

𝛽 −1 (2𝜔 + 2𝛼 + 𝛽)(𝑛 − 1)(1 − 𝑐 ∗ )𝑛−2 (𝑐 ∗ )−1 + (1 − 𝑐 ∗ )𝑛−1 (𝑐 ∗ )−2

𝜕𝑐 ∗
𝜕𝑓⁄𝜕𝛽
=−
𝜕𝛽
𝜕𝑓⁄𝜕𝑐 ∗

(14)

1
)
𝜔+𝛼+𝛽

𝛽−2 (𝜔 + 𝛼)2=(𝑛 − 1)(1 − 𝑐 ∗ )𝑛−2 (𝑐 ∗ )−1 + (1 − 𝑐 ∗ )𝑛−1 (𝑐 ∗ )−2

1
− 𝑐𝑖
𝜔+𝛼+𝛽

>0

follows:■− (𝜔 + 𝛼 + 𝛽)(𝜔 + 𝛼)𝛽

−1 ∗

𝑐 =0

Let the left-hand side of the above
equation be 𝐺(𝑐 ∗ ) . Then 𝐺(𝑐 ∗ ) is a

Proof of Corollary 1

function that is continuous onand∗∗𝜕𝐺 ⁄𝜕 𝑐 < 0 for any 𝑐 ∈ ℝ. In addition,

respect to 𝑛 is represented by:

The partial derivative of 𝑔 with𝑐∗lim 𝐺(𝑐 ∗ ) = 1

𝑐 ∗ →0andlim 𝐺(𝑐 ∗ ) < 0𝑐 ∗ →1(17)<0Equation (14) can be simplified as(1 − 𝑐

(16)

𝜕𝑐 ∗
𝜕𝑓⁄𝜕𝛼
=−
𝜕𝛼
𝜕𝑓⁄𝜕𝑐 ∗

+ {1 − (1 − 𝑐 ∗)𝑛−1 }∗ )𝑛−1(15)<0= 𝑐∗ ,

following equation holds:= Π−(1 − 𝑐 ∗ )𝑛−1 (𝑐 ∗ )−1 log(1 − 𝑐 ∗ )(𝑛 − 1)(1 − 𝑐 ∗ )𝑛−2 (𝑐 ∗ )−1 + (1 − 𝑐 ∗ )𝑛−1 (𝑐 ∗ )−2

𝜕𝑐 ∗
𝜕𝑓⁄𝜕𝜔
=−
𝜕𝜔
𝜕𝑓⁄𝜕𝑐 ∗

1
− 𝑐𝑖
𝜔+𝛼+𝛽

× (Π −

following<0∗ )𝑛−1 }Hence it follows that, if 𝑐𝑖(1 − 𝑐 ∗ )𝑛−1 × (Π −theinequalities are derived:
𝜕𝑐 ∗
𝜕𝑓⁄𝜕𝑛
=−
𝜕𝑛
𝜕𝑓⁄𝜕𝑐 ∗

1
− 𝑐𝑖
𝜔+𝛼+𝛽

In contrast, if 𝑐𝑖 ≤ 𝑐 ∗ , the following(1 − 𝑐 ∗ )𝑛−1 × (Π −theorem,𝜕𝑔= −𝛽(1 − 𝑐 ∗ )𝑛 {log(1 − 𝑐 ∗ )
𝜕𝑛

hold.

𝑛 𝜕𝑐 ∗−}
1 − 𝑐 ∗ 𝜕𝑛

Hence, there is a unique 𝑐 ∗ ∈ (0,1) thatsatisfies 𝐺(𝑐 ∗ ) = 0.

(19)Equation (19) can be simplified asfollows, by using (15):■Proof of Proposition 1
35

(18)

Suppose that 𝑛 = 2. Compare 𝑐 ∗ ,𝜕𝑔= 𝛽(1 − 𝑐 ∗ )𝑛 log(1
𝜕𝑛
− 𝑐∗)

which is obtained by equation (8), and(20)

2 − (𝑐 ∗ )−1𝑛 − 2 + (𝑐 ∗)−1𝑘 ∗ . Then it is shown that the following
inequality is satisfied:

It is shown that, in the above equation,islog(1 − 𝑐 ∗ )negative,

and

𝑐∗ =

the

denominator 𝑛 − 2 + (𝑐 ∗ )−1 is positive.
Therefore, the sign of 𝜕𝑔⁄𝜕𝑛 depends𝛽(𝜔 + 𝛼)(𝜔 + 𝛼 + 𝛽) + 𝛽< 𝑘∗ =

on the sign of the numerator 2 − (𝑐 ∗ )−1 .

𝛽(𝜔 + 𝛼)(𝜔 + 𝛼 + 𝛽)

Suppose that 𝑛 > 2. Then 𝑐 ∗ < 𝑘 ∗ is alsosatisfied.

■

The result follows from the fact that
Proof of Corollary 2
When𝜕𝑐 ∗ ⁄𝜕𝑛 < 0, as asserted in Proposition 1,

parameterssatisfytheand that threshold 𝑘 ∗ is independent ofcondition that 1 ≤ 𝛽 ⁄[(𝜔 + 𝛼)(𝜔 + 𝛼 + 𝛽)]

the value 𝑛.

all of the

As we have seen, 𝑔 is represented

analysts are sure to acquire signal 𝑥.

by 𝜔 + 𝛼 + 𝛽 − 𝛽(1 − 𝑐 ∗ )𝑛 . On the otherHence, ℎ = 𝜔 + 𝛼 + 𝛽 holds in this case,hand, Corollary 2 shows ℎ = 𝜔 + 𝛼 + 𝛽 −regardless of the value 𝑛. In contrast,𝛽(1 − 𝑘 ∗ )𝑛 such that 0 < 𝑘 ∗ < 1, and ℎ =when parameters satisfy the condition

𝜔+𝛼+𝛽

that

Consequently,

or, in other words,

1 ≤ 𝑘∗ ,𝛽⁄[(𝜔 + 𝛼)(𝜔 + 𝛼 + 𝛽)] < 1other word,

or,

in

𝑘 ∗ < 1, only analysts whose

such

that

from

.

1 ≤ 𝑘∗𝑐∗ < 𝑘∗,thefollowing inequalities are satisfied.

cost of information gathering is lower

𝜔 + 𝛼 + 𝛽 − 𝛽(1 − 𝑐 ∗)𝑛than 𝑘 ∗ acquire signal 𝑥. If all 𝑛 of the< 𝜔 + 𝛼 + 𝛽 − 𝛽(1 − 𝑘 ∗ )𝑛analysts do not collect 𝑥, the precision< 𝜔+𝛼+𝛽That is, 𝑔 < ℎ holds for 𝑛 ≥ 2.

of the investor ’s prediction results in𝜔 + 𝛼. On the other hand, if at least one■

analyst collects 𝑥, the precision of theinvestor’s prediction rises to 𝜔 + 𝛼 + 𝛽.
The probability that the former state
occurs is (1 − 𝑘 ∗ )𝑛 , and the latter state
occurs is

1 − (1 − 𝑘 ∗ )𝑛 .

(Received: January 16, 2018)(Accepted: March 15, 2018)

Consequently, ℎis represented as follows:𝜔 + 𝛼 + 𝛽 − 𝛽(1 − 𝑘 ∗ )𝑛
The partial derivative of ℎ with respect
to 𝑛 is represented by:𝜕ℎ= −𝛽(1 − 𝑘 ∗ )𝑛 log(1 − 𝑘 ∗ ) > 0
𝜕𝑛

(21)
■

Proof of Proposition 2
36

Publisher: JFMRA
May 2018