Foreign Investor Activism in Japan: The First 10 Years∗

This paper provides a comprehensive look at the first decade of foreign investor activism in Japan. Being the second largest stock market in the world with many underperforming and cash-rich firms the potential to unlock value is higher than in the U.S., but historically the barriers to shareholder activism were also higher. In the context of recent economic and regulatory transformations of the Japanese capital markets, we document an unprecedented wave of share block acquisitions by hedge fund and other investors with a total of 916 stakes filed in the period from 1998 to 2009. We show that there is, on average, a (modest) positive stock price reaction to the announcement of an activist investment and that these effects are concentrated in events involving hostile funds. Long-run returns to activism are small overall, except on positions in large target firms. We also find that activists force target firm managers to increase their payouts relative to peer firms but do not find evidence of major operational improvements, and also few targeted firms underwent significant restructuring or were subject to takeovers. Finally we document the widespread adoption for the first time of "poison pills" by Japanese firms after 2006, particularly in firms targeted by activists and a subsequent drop in investor activism. Our paper illustrates the limits to shareholder activism in a market setting where the takeover market is thin and cannot be used by the activist investor as an "exit " strategy. JEL classification: G3