Corporate governance and stock price performance during the financial crisis: Evidence from Japan

Previous studies have investigated the argument that corporate governance structures in emerging markets affected firms' stock price performance during the East Asian economic crisis. In this chapter, we analyze how corporate governance structures in an industrial country (Japan) affect firms' stock price performance during the current financial crisis. Results of this study show that Japanese firms that adopt stock option plans have suffered more from deteriorating stock price performance during the present financial crisis. Consistent with Adams (2009), this result suggests that managerial risk-taking incentives induced by stock-based compensations are responsible for declining firm performance during this crisis. Secondly, firms with more non-Japanese shareholders (cross-holding shareholders) experience larger (smaller) stock price reductions. We argue that the Japanese traditional corporate ownership structure stabilizes shareholder valuations of firms. Overall, our results suggest that, for this financial crisis, corporate governance structures are important determinants of firm performance even in industrial countries. Finally, it is apparent that firms that rely on bank financing suffer more from deteriorating stock price performance. Similar to results of existing studies, the results of this study suggest that bank-dependent firms have difficulty in obtaining financing during a financial crisis.