HOW DOES CORPORATE GOVERNANCE STRUCTURE AFFECT RISK-TAKING ACTIVITIES IN JAPANESE FIRMS?

This paper examines whether changes in corporate governance structure affect risk-taking activities in Japanese firms. New corporate governance systems have been imported into Japanese firms from the US since the late 1990s. However, Japanese firms have not necessarily been able to improve their financial performance. We analyze the effects of reforms of boards of directors on risk-taking activities because Japanese firms are too risk averse and this may lead to lower firm performance. Firstly, we analyze whether outside directors and nonexecutive directors affect risk-taking activities in Japanese firms. The results show that firms with more outside or non-executive directors promote risk-taking activities more aggressively. Secondly, we examine the differences in the effects on risk-taking activities between firms with outside directors and those with more than one outside director. The result shows that firms with more than one outside director invest in long-term capital more actively, while those with one outside director invest in more passively. Thirdly, we focus on two situations in which firms need to undertake riskier projects. The first is firms with business opportunities and the second is older firms. The result shows that firms with higher potential for growth and more than one outside director promote risk-taking activities, but that firms with higher potential for growth and only one outside director do not. Then, focusing on firm age, the result shows that older firms with one outside director undertake relatively less risky activities. Finally, we calculate the trends of sales and operating income after investment. The results show that firms with more than one outside director have a higher sales growth ratio than those with no outside directors or only one outside director. The facts suggest that risk-taking activities have economic effects on firms.