1. ^aInstitute for Technology, Enterprise and Competitiveness, Doshisha University, Karasuma Imadegawa, Kamigyo-ku, Kyoto 602-8580, Japan. E-mail: casli@mail.doshisha.ac.jp
2. ^bDeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, Ontario, Canada L8S 4M4. E-mail: yoshikat@mcmaster.ca
3. ^cGraduate School of Management, Kyoto University, Yoshida Honmachi, Sakyo-ku, Kyoto 606-8501, Japan. E-mail: hikino@gsm.kyoto-u.ac.jp
4. ^dInstitute for Technology, Enterprise and Competitiveness, Doshisha University, Karasuma Imadegawa, Kamigyo-ku, Kyoto 602-8580, Japan. E-mail: hmiyoshi@mail.doshisha.ac.jp

Received 28 February 2007; Revised 31 May 2007; Accepted 31 July 2007.

Abstract

This paper analyzes institutional and legal changes related to corporate governance and their impact on financial performance in Japan since the second half of the 1990s. We attempt to address two issues systematically: (1) how much the governance reforms of Japanese firms transformed the conventional system of alliance capitalism and managerial control; and (2) what economic outcomes those governance changes have yielded. As the Commercial Code and other legal and institutional frameworks were revised, Japanese firms experienced shifts in terms of stock ownership, corporate control and managerial organizations. Our empirical results show that the influence of new ownership composition and reformed governance mechanisms on financial performance remains varied. We find that certain factors, such as foreign and financial investors, functioned positively, while others, like the executive officer system and stock options, had little or negative performance effect. Japanese management apparently appeased market investor pressure by superficially institutionalizing various governance reforms, while enhancing financial performance through strategic modifications.