Analyses of the shareholder benefit program in Japan

Abstract

The shareholder benefit is noncash gifts and services Japanese companies provide to their shareholders. We find that firms that initiate the shareholder benefit program experience a significant increase in the number of individual investors but the average number of shares held by individual investors become smaller, indicating a more diffused ownership by individual investors. Our analyses on the price movement and trade volume around the ex-benefit day show that the shareholder benefit is reflected in the stock price around the ex-benefit day, providing evidence of an existence of shareholder benefit clientele in Japan. We also find a positive relation between firm value and the number of individual investors, our proxy for the investor recognition, consistent with Merton's (1987) investor recognition hypothesis. The positive relationship, however, does not hold when firm age is 10 years or older, asset size is larger than the median value, and the percentage ownership structure by individuals exceeds 51%. Our analyses suggest a possible trade-off between the improvement in investor recognition and the deterioration in effective monitoring due to more diffused ownership by individual investors.