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Market liquidity, private information, and the cost of capital: Market microstructure studies on family firms in Japan

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  • Ebihara, Takashi
  • Kubota, Keiichi
  • Takehara, Hitoshi
  • Yokota, Eri

Abstract

We investigate cost of capital, information asymmetry, and market liquidity of listed family firms vs. non-family firms in Japan. First, we find that the cost of debt is lower and the cost of equity is higher for family firms than non-family firms, but the differences are not significant. The WACC of family firms becomes higher than that for non-family firms and the difference is significant probably because family firms in Japan use less leverage. Next, we find that the stocks of family firms are traded with higher information asymmetry than non-family firms. As for information asymmetry and illiquidity measures, we utilize the variables Adjusted PIN and Probability of Symmetric Order Flow Shocks (PSOS). Concomitantly we also estimate alternate conventional measures of market liquidity as a robustness check. Overall, the evidence on liquidity is somewhat mixed, while we find family firms show higher information asymmetry, which may affect cost of equity. As a final policy implication, we recommend family firms in Japan conduct more voluntary and timely disclosure, in particular, for the benefit of general stock investors, and may want to increase leverage to reduce the WACC.

Suggested Citation

  • Ebihara, Takashi & Kubota, Keiichi & Takehara, Hitoshi & Yokota, Eri, 2014. "Market liquidity, private information, and the cost of capital: Market microstructure studies on family firms in Japan," Japan and the World Economy, Elsevier, vol. 32(C), pages 1-13.
    • Handle: RePEc:eee:japwor:v:32:y:2014:i:c:p:1-13
    DOI: 10.1016/j.japwor.2014.07.001
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    2. Kubota, Keiichi & Takehara, Hitoshi, 2019. "Firm-level innovation by Japanese family firms: Empirical analysis using multidimensional innovation measures," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    3. Takuya Iwasaki & Shota Otomasa & Atsushi Shiiba & Akinobu Shuto, 2012. "The role of accounting conservatism in executive compensation contracts (Forthcoming in Journal of Business Finance and Accounting)," CARF F-Series CARF-F-370, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Jul 2018.
    4. Morikawa, Masayuki, 2016. "What types of companies have female directors? Evidence from Japan," Japan and the World Economy, Elsevier, vol. 37, pages 1-7.

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    More about this item

    Keywords

    Family businesses; Cost of equity; Cost of debt; Information asymmetry; Liquidity;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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