As a shareholder, you want to know what is happening with companies you invest in. If there are positive results set to send share values rocketing, or negative reports which could lead to a tumble in prices, you rely on companies keeping you upto-date so that you can make informed decisions. The share markets rely on this as well, so that prices best reflect the true state of affairs at any of their listed companies. But such transparency, however desirable, is not always delivered. There are variations in the levels of disclosures from one firm to another, and between countries. A disclosure needs to be timely if it is to be useful to external investors, but managers may intervene, for instance if they plan to vary their own stock holdings or if the firm is seeking additional funding on better terms. The general presumption is that bettergoverned companies are more transparent to investors. To find out if this is the case, we studied more than 1,700 listed companies in Japan, a country where corporate governance (CG) has been a continuing issue. WHAT YOU DON’T KNOW, CAN HURT YOUR INVESTMENTS In the past, Japanese firms have not been viewed as particularly transparent to outsiders. They operate in a code law country, with less investor protection and weaker enforcement than in common law countries such as the UK and USA. Japanese firms’ CG typically follows stakeholder CG, which is characterised by insider-dominated boards, substantial crossshareholdings among affiliated firms, and a main bank which provides loan capital to companies in its group as well as being an influential shareholder. Close relationships between stakeholders means information may be communicated privately rather than via public disclosures, and many Japanese companies still inhibit shareholders from attending annual meetings – holding them on the same day. In 2014, just under half of Tokyo Stock Exchange (TSE) First Section firms held their annual meetings on the same day. Following the banking crisis of the early 1990s, cross-shareholding and main bank ownership have decreased, while foreign ownership has increased. Foreign shareholders emphasise the importance of closer monitoring of management, greater disclosure and improving firm performance. At the same time, the average number of board members has declined and the number of outside directors has risen. Nevertheless the boards of Japanese firms remain insiderdominated, and therefore outside directors’ effectiveness in their role is questionable. Since 2004, the TSE’s CG Principles have highlighted the importance of good CG and transparent disclosure practices. And since 2010, Japanese companies have been able to adopt International Financial Reporting Standards (IFRS); by July 2020, about 200 companies – mainly large multinationals – had chosen to do so, perhaps indicating a commitment to greater accounting quality and transparency. LET’S MAKE IT CLEAR Our study looked at the frequency and timing of disclosures by firms listed on the TSE’s First Section, and the speed of share price adjustments over a 10-year period from mid-2003 to mid-2013. TSE-listed firms are expected to disclose price-sensitive information publicly in a timely and unbiased manner – not to leak it selectively to outside parties. The TSE also highlights the importance of disclosing complete information on important issues impacting on firm performance. One implication is that no disclosure of a material (or important) issue should be withheld or delayed irrespective of whether it relates to good or bad news. The TSE expects timely and complete disclosure. Across our study, Japanese firms released a median of 1.2 documents a month to the TSE, substantially less than the figure of 4.1 documents per month in a previous cross-country study I worked on. This shows Japanese firms are less forthcoming than those in other countries, and other comparisons demonstrated they are slower to release price-sensitive documents. We found that better-governed Japanese companies did make more frequent and timelier corporate disclosures, and that their share prices reflected this information earlier, 30 |
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