Governance through Shame and Aspiration: Index Creation and Corporate Behavior

Governance through Shame and Aspiration: Index Creation and Corporate Behavior

Akash Chattopadhyay, Matthew D. Shaffer, Charles Wang

Series number :

Serial Number: 
567/2018

Date posted :

September 27 2018

Last revised :

July 18 2018
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Keywords

  • JPX-Nikkei 400 index • 
  • Corporate governance • 
  • Index inclusion • 
  • Reputation incentives • 
  • Status incentives • 
  • Return on equity • 
  • Capital efficiency • 
  • social norms

After decades of both de-prioritizing shareholders' economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country's "best-run" companies by annually selecting the 400 most profitable among Japan's large and liquid firms.

We find that managers competed to be included in the index by significantly increasing ROE, at least in part due to managers' reputational or status concerns. The ROE increase was predominantly driven by improvements in margins, which was partially driven by cutting R&D intensity-a potentially unintended consequence. Our findings suggest that indexes can affect managerial behavior through reputational or status incentives.
 

Authors

Real name:
Akash Chattopadhyay
Real name:
Matthew D. Shaffer