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    Governance Through Shame and Aspiration: Index Creation and Corporate Behavior in Japan
    07 Aug 2017Working Paper Summaries

    Governance Through Shame and Aspiration: Index Creation and Corporate Behavior in Japan

    by Akash Chattopadhyay, Matthew D. Shaffer, and Charles C.Y. Wang
    By exploiting the unique features of Japan’s JPX-Nikkei 400 index, this paper examines how membership in a stock index serves as a source of prestige that can motivate managers and influence corporate governance norms. Findings are important for understanding non-pecuniary mechanisms to induce meaningful changes in corporate behavior.
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    Author Abstract

    We study how a stock index can affect corporate behavior by serving as a source of prestige. After decades of low corporate profitability in Japan, the JPX-Nikkei400 index was introduced in 2014. The index selected 400 large and liquid firms deemed to be best performing in terms of annual profitability; membership was considered highly prestigious. We document that index-inclusion incentives led firms to increase return on equity (ROE) proportionally by 35% on average through higher margins, efficiency, or shareholder payouts, depending on where firms had “slack,” but not through changing investments or accruals. These incentives are driven by the prestige associated with the index rather than capital market benefits. Back-of-envelope estimates suggest that the index accounted for 23% of the average increase in aggregate annual earnings over our sample period and a 3% increase in aggregate market capitalization. These findings highlight a novel mechanism through which long-standing corporate behaviors can be transformed.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: August 2017
    • HBS Working Paper Number: HBS Working Paper #18-010
    • Faculty Unit(s): Accounting and Management
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    Charles C.Y. Wang
    Charles C.Y. Wang
    Glenn and Mary Jane Creamer Associate Professor of Business Administration
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