Corporate governance and corporate ownership: The investment behaviour of Japanese institutional investor

In this paper, we investigate the investment behaviour of institutional investors in
terms of their shareholdings in 2,938 companies listed on the Tokyo and Osaka Stock
Exchanges at the end of June 2002. By doing so, we provide one of the first detailed
empirical analyses of the involvement of institutional investors in the ownership structure of
Japanese listed firms. At the same time, we compare this aspect of Japanese corporate
governance with the shareholdings of banks in the same group of firms.
Our results show that the equity investments of financial investors – institutional
investors and banks – in Japanese listed companies at the end of June 2002 were
predominantly in the high-tech manufacturing, traditional manufacturing and
communications industries. All financial investors combined held more than 60% of the
equity capital of the firms listed on the Tokyo and Osaka Stock Exchanges, with banks
being the largest group of these financial investors.
Further analysis shows that on average most financial investors were minority
shareholders, holding up to 3% of a firm’s total shares. Domestic financial investors tended
to have higher levels of ownership than foreign institutions, and small and minority
shareholdings were more common among foreign financial investors than among domestic
banks and institutional investors.
Finally, the average shareholdings of six large Japanese financial groups in
Japanese listed companies were considerable, representing an average ownership level
of 3.3% of a firm’s stock. However, they were not as high as to exert a significant degree of
corporate control.
All in all, we conclude that as of end-June 2002, banks continued to be important
shareholders of Japanese listed firms, owing around 34% of the market capitalisation of all
listed firms on the Tokyo and Osaka Stock Exchanges. At the same time, institutional
investors, predominantly investment firms and insurance companies, were important
shareholders as well, accounting for around 27% of total market capitalisation. Moreover,
we found that foreign investment funds were very important shareholders of Japanese
listed firms, which confirms the general perception that foreign ownership of Japan’s
corporate sector has become a rather crucial characteristic of the system of corporate
governance in Japan