IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v135y2020i3p704-724.html
   My bibliography  Save this article

Governance through shame and aspiration: Index creation and corporate behavior

Author

Listed:
  • Chattopadhyay, Akash
  • Shaffer, Matthew D.
  • Wang, Charles C.Y.

Abstract

After decades of de-prioritizing shareholders’ economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country’s “best-run” companies by annually selecting the 400 most profitable of its large and liquid firms. We find that managers competed for inclusion in the index by significantly increasing return on equity (ROE), and they did so at least in part due to their reputational or status concerns. The ROE increase was predominantly driven by improvements in margins, which were in turn partially driven by cutting research and development (R&D) intensity. Our findings suggest that indexes can affect managerial behavior through reputational or status incentives.

Suggested Citation

  • Chattopadhyay, Akash & Shaffer, Matthew D. & Wang, Charles C.Y., 2020. "Governance through shame and aspiration: Index creation and corporate behavior," Journal of Financial Economics, Elsevier, vol. 135(3), pages 704-724.
    • Handle: RePEc:eee:jfinec:v:135:y:2020:i:3:p:704-724
    DOI: 10.1016/j.jfineco.2019.07.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X19301783
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfineco.2019.07.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Honghui Chen & Gregory Noronha & Vijay Singal, 2004. "The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation," Journal of Finance, American Finance Association, vol. 59(4), pages 1901-1930, August.
    2. Alexander Dyck & Natalya Volchkova & Luigi Zingales, 2008. "The Corporate Governance Role of the Media: Evidence from Russia," Journal of Finance, American Finance Association, vol. 63(3), pages 1093-1135, June.
    3. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2015. "Corporate Culture, Societal Culture, and Institutions," American Economic Review, American Economic Association, vol. 105(5), pages 336-339, May.
    4. Jeremy C. Stein, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 655-669.
    5. Luigi Zingales, 2015. "Does Finance Benefit Society?," NBER Working Papers 20894, National Bureau of Economic Research, Inc.
    6. Harris, Lawrence E & Gurel, Eitan, 1986. "Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-829, September.
    7. Doron Israeli & Charles M. C. Lee & Suhas A. Sridharan, 2017. "Is there a dark side to exchange traded funds? An information perspective," Review of Accounting Studies, Springer, vol. 22(3), pages 1048-1083, September.
    8. Itzhak Ben‐David & Francesco Franzoni & Rabih Moussawi, 2018. "Do ETFs Increase Volatility?," Journal of Finance, American Finance Association, vol. 73(6), pages 2471-2535, December.
    9. Zhi Da & Sophie Shive, 2018. "Exchange traded funds and asset return correlations," European Financial Management, European Financial Management Association, vol. 24(1), pages 136-168, January.
    10. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    11. Pablo Casas-Arce & F. Asís Martínez-Jerez, 2009. "Relative Performance Compensation, Contests, and Dynamic Incentives," Management Science, INFORMS, vol. 55(8), pages 1306-1320, August.
    12. Lili Dai & Jerry T. Parwada & Bohui Zhang, 2015. "The Governance Effect of the Media's News Dissemination Role: Evidence from Insider Trading," Journal of Accounting Research, Wiley Blackwell, vol. 53(2), pages 331-366, May.
    13. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2015. "The value of corporate culture," Journal of Financial Economics, Elsevier, vol. 117(1), pages 60-76.
    14. Avery, Christopher & Chevalier, Judith A & Schaefer, Scott, 1998. "Why Do Managers Undertake Acquisitions? An Analysis of Internal and External Rewards for Acquisitiveness," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 14(1), pages 24-43, April.
    15. Minoru Nakazato & J. Mark Ramseyer & Eric B. Rasmusen, 2011. "Executive Compensation in Japan: Estimating Levels and Determinants from Tax Records," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 843-885, September.
    16. Shleifer, Andrei, 1986. "Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-590, July.
    17. Yen-Cheng Chang & Harrison Hong & Inessa Liskovich, 2015. "Regression Discontinuity and the Price Effects of Stock Market Indexing," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 212-246.
    18. Robin Greenwood, 2008. "Excess Comovement of Stock Returns: Evidence from Cross-Sectional Variation in Nikkei 225 Weights," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1153-1186, May.
    19. Boone, Audra L. & White, Joshua T., 2015. "The effect of institutional ownership on firm transparency and information production," Journal of Financial Economics, Elsevier, vol. 117(3), pages 508-533.
    20. Kato, Takao & Kubo, Katsuyuki, 2006. "CEO compensation and firm performance in Japan: Evidence from new panel data on individual CEO pay," Journal of the Japanese and International Economies, Elsevier, vol. 20(1), pages 1-19, March.
    21. Masulis, Ronald W. & Mobbs, Shawn, 2014. "Independent director incentives: Where do talented directors spend their limited time and energy?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 406-429.
    22. Focke, Florens & Maug, Ernst & Niessen-Ruenzi, Alexandra, 2017. "The impact of firm prestige on executive compensation," Journal of Financial Economics, Elsevier, vol. 123(2), pages 313-336.
    23. Appel, Ian R. & Gormley, Todd A. & Keim, Donald B., 2016. "Passive investors, not passive owners," Journal of Financial Economics, Elsevier, vol. 121(1), pages 111-141.
    24. Luigi Zingales, 2015. "Presidential Address: Does Finance Benefit Society?," Journal of Finance, American Finance Association, vol. 70(4), pages 1327-1363, August.
    25. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luo, Lianfa & Cheng, Zhiming & Ye, Qingqing & Cheng, Yanjun & Smyth, Russell & Yang, Zhiqing & Zhang, Le, 2023. "Nonmonetary Awards and Innovation: Evidence from Winning China's Top Brand Contest," GLO Discussion Paper Series 1345, Global Labor Organization (GLO).
    2. Masanori Orihara, 2023. "COVID-19: Firm Value and Pre-Existing Corporate Governance Regulations," Working Papers 2218, Waseda University, Faculty of Political Science and Economics.
    3. Marco BECHT & Julian FRANKS & MIYAJIMA Hideaki & SUZUKI Kazunori, 2023. "Does Paying Passive Managers to Engage Improve ESG Performance?," Discussion papers 23077, Research Institute of Economy, Trade and Industry (RIETI).
    4. Yamoah, Fred A. & Yawson, David Eshun, 2022. "Promoting global well-being through fairtrade food: the role of international exposure," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 26(2), November.
    5. Ishida, Souhei & Kochiyama, Takuma, 2020. "ISS’s Proxy Voting Guidelines and ROE Management," Working Paper Series 235, Management Innovation Research Center, School of Business Administration, Hitotsubashi University Business School.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Benjamin Bennett & René M. Stulz & Zexi Wang, 2020. "Does Joining the S&P 500 Index Hurt Firms?," NBER Working Papers 27593, National Bureau of Economic Research, Inc.
    2. Martijn Cremers & Ankur Pareek & Zacharias Sautner, 2020. "Short-Term Investors, Long-Term Investments, and Firm Value: Evidence from Russell 2000 Index Inclusions," Management Science, INFORMS, vol. 66(10), pages 4535-4551, October.
    3. Agarwal, Vikas & Hanouna, Paul & Moussawi, Rabih & Stahel, Christof W., 2021. "Do ETFs increase the commonality in liquidity of underlying stocks?," CFR Working Papers 21-04, University of Cologne, Centre for Financial Research (CFR).
    4. Lawrence Glosten & Suresh Nallareddy & Yuan Zou, 2021. "ETF Activity and Informational Efficiency of Underlying Securities," Management Science, INFORMS, vol. 67(1), pages 22-47, January.
    5. Escobar,Mariana,Pandolfi,Lorenzo,Pedraza Morales,Alvaro Enrique,Williams,Tomas, 2021. "The Anatomy of Index Rebalancings : Evidence from Transaction Data," Policy Research Working Paper Series 9770, The World Bank.
    6. Charles Cao & Matthew Gustafson & Raisa Velthuis, 2019. "Index Membership and Small Firm Financing," Management Science, INFORMS, vol. 65(9), pages 4156-4178, September.
    7. Daniel Schmidt & Bastian von Beschwitz, 2022. "Passive Ownership and Short Selling," International Finance Discussion Papers 1365, Board of Governors of the Federal Reserve System (U.S.).
    8. Steven Chong Xiao, 2020. "Do Noisy Stock Prices Impede Real Efficiency?," Management Science, INFORMS, vol. 66(12), pages 5990-6014, December.
    9. Coles, Jeffrey L. & Heath, Davidson & Ringgenberg, Matthew C., 2022. "On index investing," Journal of Financial Economics, Elsevier, vol. 145(3), pages 665-683.
    10. Jiang, Hao & Vayanos, Dimitri & Zheng, Lu, 2020. "Tracking biased weights: asset pricing implications of value-weighted indexing," LSE Research Online Documents on Economics 118847, London School of Economics and Political Science, LSE Library.
    11. Chen, Hung-Ling & Shiu, Cheng-Yi & Wei, Hui-Shan, 2019. "Price effect and investor awareness: Evidence from MSCI Standard Index reconstitutions," Journal of Empirical Finance, Elsevier, vol. 50(C), pages 93-112.
    12. Kenechukwu E. Anadu & Mathias S. Kruttli & Patrick E. McCabe & Emilio Osambela & Chaehee Shin, 2018. "The Shift from Active to Passive Investing: Potential Risks to Financial Stability?," Supervisory Research and Analysis Working Papers RPA 18-4, Federal Reserve Bank of Boston.
    13. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    14. Schnitzler, Jan, 2018. "S&P 500 inclusions and stock supply," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 341-356.
    15. Anand M. Vijh & Jiawei (Brooke) Wang, 2022. "Negative returns on addition to the S&P 500 index and positive returns on deletion? New evidence on the attractiveness of S&P 500 versus S&P 400 indexes," Financial Management, Financial Management Association International, vol. 51(4), pages 1127-1164, December.
    16. Yen-Cheng Chang & Harrison Hong & Inessa Liskovich, 2015. "Regression Discontinuity and the Price Effects of Stock Market Indexing," Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 212-246.
    17. Luca J. Liebi, 2020. "The effect of ETFs on financial markets: a literature review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(2), pages 165-178, June.
    18. Itzhak Ben-David & Francesco A. Franzoni & Rabih Moussawi, 2019. "An Improved Method to Predict Assignment of Stocks into Russell Indexes," Swiss Finance Institute Research Paper Series 19-56, Swiss Finance Institute.
    19. Pandolfi, Lorenzo & Williams, Tomas, 2019. "Capital flows and sovereign debt markets: Evidence from index rebalancings," Journal of Financial Economics, Elsevier, vol. 132(2), pages 384-403.
    20. Schmidt, Cornelius & Fahlenbrach, Rüdiger, 2017. "Do exogenous changes in passive institutional ownership affect corporate governance and firm value?," Journal of Financial Economics, Elsevier, vol. 124(2), pages 285-306.

    More about this item

    Keywords

    JPX-Nikkei 400 index; Corporate governance; Index inclusion; Reputation incentives; Status incentives; Return on equity; Capital efficiency; Social norms;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:135:y:2020:i:3:p:704-724. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.