2005 Articles

Choice as Regulatory Reform: The Case of Japanese Corporate Governance

Gilson, Ronald J.; Milhaupt, Curtis J.

In this paper, we examine a unique recent approach to corporate governance reform in Japan. The reform permits firms to switch from “Japanese” to “U.S” board structure, featuring independent committees of the board for audit, compensation, and nomination. We examine the first year of adoptions (the 2003 annual shareholders meeting season) in this natural experiment, frame hypotheses concerning why Japanese firms might make the switch, and conduct an event study to assess the hypotheses in light of the market’s reaction to firm announcements of the decision to switch. We conclude with an intellectual roadmap for future reform of Japanese corporate governance, highlighting a potential shortcoming in the new board option.