Shame, Prestige Drive Returns at Some of Japan's Biggest Firms

  • Race to join index has pushed up ROE, Harvard study finds
  • Companies improved margins, efficiency or shareholder payouts

Morning commuters make their way to work in Tokyo.

Photographer: Kiyoshi Ota/Bloomberg

A desire for prestige and the wish to avoid shame among managers have boosted returns at some of Japan’s leading companies, according to new research.

Academics at Harvard Business School and the University of Toronto based their study on the shareholder-friendly JPX Nikkei Index 400, a gauge designed to showcase the nation’s most profitable large companies. Launched in 2014, the index’s membership is reviewed annually, with inclusion based on returns on equity, operating income and market value.

“The index quickly acquired prestige status, and adopted the nickname the ‘shame index,’ a reference to the experience of firms that failed to make the cut each year,” said authors Akash Chattopadhyay, Matthew Shaffer and Charles Wang.

The researchers focused on 200 companies that were deemed to have the greatest incentive to improve their performance:

  • The 100 ranked from 301 to 400, which were most at risk of dropping out of the index at the annual review.
  • The 100 that, though not in the index, were assessed to be closest to gaining admission.

These firms increased ROE by 1.8 percentage points on average through higher margins, efficiency or shareholder payouts, according to the academics, who found evidence that the improvements were linked to a desire to get into the JPX-400, or avoid getting kicked out.

“These effects are primarily driven by managers’ concerns for prestige associated with belonging to the index -- either the aspiration to obtain prestige or the shame from loss of prestige,” Wang said by email.

Becoming more capital-efficient drove market valuations higher, and the introduction of the index made a significant contribution to the overall economy, the researchers found. Based on what they described as “back of envelope” calculations, they added: “We estimate that the incremental total earnings attributable to the JPX400 represent a 3 percent increase in Japanese market capitalization.”

Since its launch, however, the JPX-Nikkei Index 400 has failed to outperform Japan’s broader Topix index. The study was based on the 2014-2015 period, and the ROE of companies in the index has been volatile since then.

The paper, “Governance Through Shame and Aspiration: Index Creation and Corporate Behavior in Japan,” differs from previous studies that have focused on companies’ behavior after admission, rather than their efforts to gain inclusion or avoid exclusion.

Read more: GPIF Needs to Pay More Than Lip Service to Governance

The researchers said their findings could assist corporate governance reform drives in other markets that -- like Japan -- have low capital efficiency and weak shareholder rights, such as China, South Korea, Singapore and Taiwan.

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