Investor repricing of chronic undervaluation: Evidence from the Tokyo Stock Exchange capital efficiency initiative

Following the 2023–2024 Tokyo Stock Exchange (TSE) capital-efficiency initiative, investors favored low price-to-book (PBR) firms, particularly those with high return on equity (ROE). These effects are concentrated among persistently undervalued firms, increase smoothly with the degree of undervaluation rather than jumping at the regulatory threshold, and are robust to endogenous treatment assignment. Although firms’ value-enhancing plans were already publicly available in corporate governance reports, the TSE’s consolidated compliance list triggered strong market reactions, consistent with a salient informational event. We find no short-run improvements in realized profitability or upward revisions in analyst earnings forecasts, but significant declines in illiquidity and increases in valuation ratios among low-PBR firms. We also find little evidence of a persistent “price-of-shame” mechanism or strong industry-level spillovers, although spillovers through non-industry links cannot be fully ruled out. Overall, the evidence suggests that the reform primarily triggered investor-side repricing of chronic undervaluation rather than immediate changes in firm behavior.