Strategic investments in Japanese corporations: Do foreign portfolio owners foster underinvestment or appropriate investment?

This paper investigates the effect of foreign ownership on strategic investments in Japanese corporations. Foreign owners are typically portfolio investors who frequently buy and sell shares and hold diversified portfolios of small stakes in many firms. Prior research has presented two conflicting p...

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Bibliographic Details
Main Authors: DAVID, Parthiban, YOSHIKAWA, Toru, CHARI, Murali D. R., RASHEED, Abdul A.
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2006
Subjects:
R&D
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/2507
https://ink.library.smu.edu.sg/context/lkcsb_research/article/3506/viewcontent/StrategicInvJapaneseCorp_SMJ_2006.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:This paper investigates the effect of foreign ownership on strategic investments in Japanese corporations. Foreign owners are typically portfolio investors who frequently buy and sell shares and hold diversified portfolios of small stakes in many firms. Prior research has presented two conflicting perspectives on the role of such investors: (a) their frequent trading leads to pressure for short-term returns that fosters underinvestment; (b) their active trading fosters appropriate investments. We investigated the relationship between foreign ownership and strategic investments using dynamic panel data analysis of a sample of 146 Japanese manufacturing firms from 1991 to 1997. We found that foreign ownership enhances strategic investments (in R&D and capital intensity) to a greater extent when firms have growth opportunities than when they lack such opportunities. We conclude that foreign ownership fosters appropriate investment.