Is Japan Really a “Buy”? The Corporate Governance, Cash Holdings, and Economic Performance of Japanese Companies

Over the past ten years there has been much discussion about whether corporate governance in Japan has improved and, if so, whether this has translated into improved corporate performance. We investigate whether observed changes in Japanese firms ’ cash holdings and payout policy are consistent with improved governance practices. To do this, we benchmark Japanese firms against U.S. firms. We find mixed evidence on whether Japanese governance has improved overall, in that the cash holdings of Japanese firms are still systematically higher than those of U.S. firms. However, we also find that for Japanese firms there is an inverse relation between changes in (excess) cash holdings and changes in performance, consistent with improvements in governance being associated with improved performance. Further, we find that the market valuation of cash holdings was systematically lower for Japanese firms than U.S. firms in the 1990s, consistent with poorer governance, but that this difference largely reverses in the 2000s. Overall, our evidence suggests that governance practices in Japan have improved for some firms, and that when governance does improve it is associated with improvements in performance and valuation