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This paper provides a comprehensive examination of the first decade of investor activism in Japan. In the context of a remarkable transformation of the Japanese capital market, we document the rise of hedge fund and other investors with a total of 916 filings of block acquisitions by activists in the period from 1998 to 2009. We show that there is, on average, a (modest) positive stock price reaction to the announcement of an activist investment. These effects, however, are concentrated in events involving hostile funds. When we examine returns to activism in the long run we find that gains are not significant overall, except on positions in large target firms. We find that target firms tend to increase their payouts relative to peer firms in response to activist campaigns but we fail to find evidence that activists force target firm managers to institute major operational improvements. Finally we document the explosion in the adoption of "poison pills" by Japanese firms. We find that firms targeted by activists were more likely to adopt defense mechanisms. Since 2007 there has been a substantial reduction in activity by activist funds. Our paper contributes to the literature on investor activism by illustrating the limits to the success of activist funds in a market setting where the takeover market is thin and cannot be used by the activist investor as an "exit" strategy.

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The dramatic rise and fall of the Japanese equity market provides us with a unique opportunity to examine market- and firm-specific risks over different market conditions. Contrary to the U.S. experience, we document a surprising fall in firm-level volatility and turnover in Japanese stocks after the market crash. Accordingly, correlations among individual stocks have increased and the number of stocks needed to achieve a given level of diversification has declined. As a consequence, we suggest that it has become more difficult over the past decade for both investors and managers to separate highquality from low-quality firms, making the Japanese market less efficient. Moreover, changes in firm-level volatilities are positively related to corporate bankruptcies, indicating that improvements in information efficiency occur when regulations on corporate bankruptcies are relaxed. These results suggest that the sharp fall in firm-level volatility during the 1990-1996 period could be due to a lack of corporate restructuring. This is more evident for firms with business group and main bank affiliations, whose firm-level volatility is less dependent on economic conditions than that of firms with no affiliations. Thus, we argue that a lack of "creative destruction" may have led to Japanese market inefficiency and a vicious cycle of capital misallocation.

In 1993, the corporate bond primary market in Japan underwent a major change. The Financial System Reform Act allowed banks to enter the underwriting business by setting up securities subsidiaries. This paper analyzes yield differentials between issues underwritten by bank subsidiaries and those underwritten by securities houses. By estimating a regression model with correction for self-selection bias, we can distinguish between several hypotheses concerning the effect of bank underwriting of corporate bonds on their yields. We show that investors discount corporate bonds underwritten by bank-owned subsidiaries because they suspect conflict of interest. Bank-owned subsidiaries, on the other hand, try to avoid this conflict by underwriting bonds intended for institutional investors and bonds issued by firms with weak main bank ties. While investors' suspicions of conflict of interest may put bank-owned subsidiaries at a disadvantage with respect to incumbent security houses, this study suggests that an aggressive entry strategy on the part of bank-owned subsidiaries has offset the disadvantage so far. In light of the recent repeal of the Glass Steagall Act, these findings will be of particular interest to observers of the changing nature of the securities business in the United States.

This paper studies the impact of foreign investment on domestic financial markets. It examines the empirical validity of some protectionist claims used by regulators to restrict foreign investment. These people argue that 1) trading by foreign investors tends to increase market volatility more than trading by domestic investors, 2) foreign investors have sophisticated investment technology to which domestic investors do not have access so that domestic investors tend to "lose" to foreign investors, and 3) foreign investors tend to be short term investors whose investments are mostly driven by expectation of short-term gains rather than long-term fundamentals such as corporate dividend growth. We find there is no evidence supporting these claims from the Japanese experience. To the contrary, we find that foreign investors tend to be long-term contrarian players in the market and their presence helps to improve liquidity in the Japanese market. Thus, our results support the hypothesis that international free flow of equity capital is beneficial to domestic markets.

There has been constant friction between the U.S. and Japan on economic issues. After lengthy negotiations and threats of reprisal, Japan agreed to sell its Government Bonds through auctions that were open to foreign competition. This paper examines the U.S. experience in the Japanese Government Bond (JGB) auctions. It also empirically tests the predictions of auction theory with JGB auction data. While the winning share of U.S. firms in 10-year JGB auction market went through ups and downs, their share in the 20-year market has increased steadily. We find that the winning shares by the U.S. firms are positively related to auction profits, whereas the Japanese "Big Four" winning shares show negative association. We offer some possible explanations for this phenomenon. Furthermore, the average profits to winning bids in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are found to be insignificant in determining auction profits.

For most of the postwar period, the U.S. and Japan have had polar opposite corporate financial structures. The U.S. system has featured low leverage and low monitoring of corporate management by investors, while the Japanese system has featured high leverage and high monitoring. During the last 15 years, however, the two systems have begun to converge. Leverage has increased in the U.S., particularly when measured by interest expense ratios, and the increase has been concentrated in certain firms. In Japan, leverage has decreased across the board. In the U.S., debt-holders' interests may now be represented more effectively; Jensen (1989) argues that LBO partners are a new organizational form which can monitor corporations more effectively. In Japan, while the role of a main bank as a delegated monitor is similar to the LBO partners in the U.S., the growing use of public debt held by outsiders rather than main banks suggests the opposite trend. This paper uses cross-sectional data to reveal more clearly the changing capital structure of Japanese corporations.

This paper uses the predictability of monthly excess returns on U.S. and Japanese equity portfolios over the U.S. Treasury bill rate to study the integration of long-term capital markets in these two countries. During the period 1971-1990 similar variables, including the dividend-price ratio and interest rate variables, help to forecast excess returns in each country. In addition, in the 1980's U.S. variables help to forecast excess Japanese stock returns. There is some evidence of common movement in expected excess returns across the two countries, which is suggestive of integration of long-term capital markets.

This paper examines daily open-to-close returns from three major stock markets over the past five years including the October 1987 Stock Market Crash. We find some evidence that volatility spillover effects emanating from Japan have been gathering strength over time, especially after the 1987 Crash. This may be attributed to a growing awareness of domestic investors about the economic interdependence of international financial markets.

This paper studies the relation between short-term and long-term interest rates in Japan. The paper finds that there was a change in the behavior of the Japanese term structure in the mid-1980's. Short-term rates became less forecastable from their own past history; at the same time, the ability of the Japanese yield curve to forecast short-term rates increased. In this sense the expectations theory has become a more appropriate description of the Japanese term structure, even though the theory is rejected at conventional levels of statistical significance.