Table of contents(24 chapters)
Japan has always been an “odd man out” from the standpoint of Western norm or Western finance. It is a country that is as developed as any in the West. However, it is also a country that possesses the significant institutional and cultural traits that separate it from the West. An important question in finance is to what extent the basic models of finance, developed with the Western “perfect market” view in mind, can be applied to Japan; or conversely, what critical adjustments must be made to make models amenable to the reality of Japanese finance.
The increased market share of foreign investment trusts in Japan may be attributed to the fact that Japanese managers have dramatically underperformed benchmarks. Recently, we showed that this underperformance can be attributed to a unique Japanese tax environment. Using data from 1998 though 2001, we find that Japanese and foreign managers are becoming very similar in style and performance. However, Japanese managers suffered in the immediate aftermath of a major April 2000 revision in the tax code. We attribute this result to the huge inflow of new money into this sector and the style shifts necessary to accommodate this flow.
Many researchers suggest that investment bankers underprice IPOs. However, from 1989 to 1996, all Japanese IPOs were auctioned, reducing the role of underwriters. Initial returns of Japanese price-competitive IPOs are not found lower than underwriter-priced U.S. IPOs. Issue size, firm size, general market movements, insider sales levels, and underwriter quality are not highly related to initial returns under price-competitive auctions. However, there appears to be a strong partial adjustment phenomenon. Thus, price-competitive auctions did not result in significantly lower initial returns, but did reduce the impacts of many traditional variables found to significantly affect initial returns in U.S. underwriter-priced IPOs.
We examine bidder returns in Japanese mergers and find that shareholders of bidders experience a significant positive announcement return. Bidder returns are higher when firms acquire targets in the same industry, when their managers performed well before the merger, and when their managers acquire relatively large targets. Unlike non-keiretsu firms, returns to keiretsu firms are higher when they acquire firms operating in different industries. We also find that bidder returns increase with the bidder’s leverage and the bidder’s ties to financial institutions through borrowings. Our evidence is consistent with the view that managerial incentives affect firm value.
Using recent panel data on U.S. and Japanese firms and time-series, cross-sectional analysis, this study documents that in both countries controlling for the investment opportunity set, investments are significantly positively influenced by internal cash flows. This relationship strengthens with the degree of constraints faced in Japan but not in the U.S. Our findings indicate that firms in both countries operate in financially imperfect markets using a pecking order in financing. As expected for Japanese companies, investment by Keiretsu member companies was significantly less influenced by cash flow and more influenced by the investment opportunity set compared to investment by non-member companies.
This paper presents an empirical analysis of trade credit supplied by Japanese manufacturing firms and General Trading Companies. After reviewing major trade credit models and relevant Japanese literature, empirical tests examine the applicability of existing trade credit theories. Results indicate existing trade credit theory has little power to explain the level of trade credit supplied by Japanese firms. Instead, support is found for the information and risk sharing models in the Japanese keiretsu literature and the financial channeling process by which lending institutions supply General Trading Companies with liquidity that is, in turn, supplied to manufacturing firms.
IPO MECHANISMS: A COMPARISON OF BOOK-BUILDING, DISCRIMINATORY PRICE AUCTIONS AND UNIFORM PRICE AUCTIONS
Using data from the U.S., Japan and Israel, we test two hypotheses suggested by theory regarding the comparison of book-building and auction IPO mechanisms. Our results are inconsistent with both hypotheses. We find that underpricing is higher under book-building than under auctions, even after attempting to control for market conditions, firm size, lead underwriter and information gathered. We also find that higher underpricing is associated with less pricing accuracy in the U.S. and that U.S. IPO aftermarket prices are less accurate than Japanese prices, using both aftermarket volatility and long run returns as indicators of accuracy.
Using the ARFIMA-FIGARCH model, this paper studies the efficiency of the Japanese equity market by examining the statistical properties of the returns and volatility of the Nikkei 225. It shows that both follow a long-range dependence, which stands against the applicability of the efficient market hypothesis. The result is valid for all sample periods, suggesting that the Japanese market remains inefficient despite the recent equity market reform.
We examine the impact of the unique Japanese stock market microstructure on the pricing of stock index futures contracts. We use intraday transactions data for the Nikkei 225 Futures contracts in Osaka and the corresponding Nikkei 225 Index in Tokyo. Incorporating more realistic transaction-cost estimates and various institutional impediments in Japan, we find that the time-varying liquidity of some component shares of the index in Tokyo represents the most critical impediment to intraday arbitrage and often causes futures prices in Osaka to deviate significantly and persistently from their no-arbitrage boundary, especially for longer-lived contracts.
PRICE AND VOLUME EFFECTS ASSOCIATED WITH A CHANGE IN THE NIKKEI 225 INDEX LIST: NEW EVIDENCE FROM THE BIG CHANGE ON APRIL 2000
This paper examines stock price and volume effects associated with a change in the composition of the Nikkei 225 index in Japan in April 2000. Our results include the following: first, we show that newly added firms experience significant positive excess returns of 19% in the five-day period after the announcement of the change; in contrast, deleted and remaining firms’ returns are negatively affected, −36 and −14%, respectively; second, volume tests show significant increase in trading activity after the announcement for both added and deleted firms; third, cross-sectional analysis provides evidence that higher arbitrage risk and demand shocks increase the absolute value of excess returns.
We empirically investigate the extent to which index options markets anticipated the sharp decline in stock prices in early 1990 in Japan. A skewness index (Bates, 1991) measuring the extent to which out-of-the-money puts are priced relative to calls is estimated.
This paper investigates Japanese stock returns for the Friday, Monday and Tuesday surrounding U.S. Monday holiday closures. The empirical results show that U.S. Monday closures have a statistically significant impact on Japanese stock return dynamics for surrounding trading days, but do not support the hypothesis that the U.S. Monday and Japanese Tuesday effects are related. Potential explanations for the occurrence and then disappearance of the Japanese Tuesday effect rely on market microstructure properties unique to the Tokyo market. The spillover effects from New York to Tokyo have been increased in density over time, which is attributed to market structural changes represented by the introduction of Nikkei 225 index futures on the SIMEX in 1986.
A key problem for Japanese government policy relates to developing alternate forms of financing and investment. This study recommends that further development of Japan’s corporate bond market will provide an alternate investment vehicle, though improved access by foreign market participants including borrowers, investors and investment banks is a necessary precondition to the development of this market. Concerted efforts must be made to ease Japanese investors’ excessive aversion to risk, which limits the development of the extensive high-yield markets that exist in the U.S. and are now developing in Europe.
This paper re-examines the relationship between interest rate changes and bank stock returns using the Japanese experience. Specifically, we test the relationship under two different regulatory regimes. During the first regime (1975–1983), there was strict regulation of the financial system and significant oversight of bank activities, whereas the latter regime (1984–1994) represented a period of financial liberalization and interest rate deregulation. The results presented here indicate that interest rate changes negatively affected Japanese bank equity in the post-regulatory period, but not during the period of heavy regulation. Additionally, we also find that most of the short-term rate effects were channeled through volatility proxies while long-term effects were channeled through yield spread and shape effects. These findings represent new and important insights into the relationship between interest rate changes and bank stock returns.
The paper examines the relationship between subordinated debt yield spreads of Japanese banks and bank-specific risk in the Japanese bond market. Subordinated debt issued by banking organizations may enhance the market discipline of banking organizations. In order to give a theoretical explanation for this, the paper develops models that describe how yield spreads of subordinated debt may be related to bank-specific risks and systematic risks. Although the sample size of this study is not large enough to draw an undisputed conclusion, the models tested here find no clear evidence of a positive relationship between subordinated debt premiums and bank-specific risks in the Japanese market. These findings for the Japanese market suggest that in the current environment of the Japanese financial system, issuing subordinated debt is unlikely to improve the prudential supervision of banks with market forces as suggested in the newly proposed Basel Accords.
COMPARISON OF THE SHORT-TERM AND THE LONG-TERM CHARACTERISTICS OF THE JAPANESE AND THE U.S. SPOT INTEREST RATE
I will investigate the short-term and the long-term characteristics of Japanese daily overnight call rate between 1985 and 1999 and compare it with the U.S. federal funds rate during the same period. Such long-term data for the former has not been utilized in the previous studies. When we compare the short-term characteristics of these two rates with the corresponding long-term ones, those are found to be different. When we compare these two rates in the short-term as well as in the long-term, the long-term characteristics are found to be different, even though the short-term characteristics are similar in some sub-sample periods.
Using intraday prices for the S&P 500 and Nikkei Stock Average stock indexes and aggregate trading volume for the New York and Tokyo Stock Exchanges, we show how short-run comovements between national stock market returns vary over time in a way related to the trading volume and liquidity in those markets. We frame our analysis in the context of the heterogeneous-agent models of trading developed by Campbell, Grossman and Wang (1993) and Blume, Easley and O’Hara (1994) and Wang (1994) which predict that trading volume acts as a signal of the information content of a given price move. While we find that there exists significant short-run dependence in returns and volatility between Japan and the U.S., we offer new evidence that these return “spillovers” are sensitive to interactions with trading volume in those markets. The cross-market effects with volume are revealed in both close-to-open and open-to-close returns and often exhibit non-linear patterns that are not predicted by theory.
This study develops an equilibrium model of credit spreads on Japanese yen Eurobonds based on a model proposed by Collin-Dufresne, Goldstein and Martin (2001). We find the asset factor, as proxied by the change in the stock market index, has only a limited effect, while the interest rate factor has the over-riding influence. There is also evidence that currency volatility and changes in the term structure occasionally have an effect on spread behaviour. Analysis over several subperiods, based around key economic events, demonstrates that the relative weight of these explanatory variables change over time.
This paper investigates the empirical determinants of the initial FDI entry decisions by Japanese firms to enter into the U.S and Taiwanese markets. The study is based on a full-sample survey of firms listed on Japanese stock exchanges and is for the period 1976–2000. We find that a number of macro/financial as well as micro (company-specific) variables are highly significant in explaining the observed entry pattern.
This paper presents a new adaptive technique for forecasting the Yen/U.S. Dollar exchange rate. The proposed method assumes a time-varying model to describe the evolution of the exchange rate. Weekly predictions of the Yen/U.S. Dollar rate are dominated by weekly announcements of unexpected changes in the relative unemployment claims between the U.S. and Japan. Monthly predictions are more sensitive to monthly releases of the difference between the expected and announced value of the National Association of Purchasing Managers index. The predictive results of the proposed method are found more accurate than that of conventional ARMA techniques.
DOES THE DAY-OF-THE-WEEK EFFECT IN FOREIGN CURRENCY MARKETS DISAPPEAR? EVIDENCE FROM THE YEN/DOLLAR MARKET
The anomalous patterns in foreign exchange markets have received relatively little attention in the literature. This paper empirically investigates the Day-of-the-Week effect in the yen-dollar currency market for three decades and confirms that such effect did exist for the period 1973–1989, but it disappears for the 1990s. The results remain unchanged when the business condition effect, the January effect, the holiday effect, and the first and last day of the month effect are controlled. The results suggest that financial deregulation in Japan has made foreign currency markets more efficient in recent years.
This paper examines the exchange risk sensitivity of Japanese firms, and the exchange risk pricing in the Japanese stock market for the period of 1975–2001. We find that an appreciation of the yen is positively associated with industry portfolio returns. This supports the dominance of wealth effects over cash flow effects. This is in contrast to U.S. studies that report a weak, negative relationship between stocks and the domestic currency. The results are more pronounced in the pre-Crash period, and vary somewhat depending on the exchange risk measures used. Similarly, the exchange risk is priced in the pre-Crash period, but not in the post-Crash period. These results suggest that the exchange rate elasticity of the Japanese economy has declined in the post-bubble period of economic stagnation.