Japan’s love for derivative actions: Irrational behaviour and non-economic motives as rational explanations for shareholder litigation

Not long ago, there was a consensus in the legal academy that the Japanese were irrational litigants. As the theory went, Japanese people would forgo litigating for financial gain because of a cultural obsession with maintaining social harmony. Based on this theory, it made perfect (but economically...

Full description

Saved in:
Bibliographic Details
Main Authors: PUCHNIAK, Dan W., NAKAHIGASHI, Masafumi
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2012
Subjects:
Online Access:https://ink.library.smu.edu.sg/sol_research/4003
https://ink.library.smu.edu.sg/context/sol_research/article/5961/viewcontent/japans_love.pdf
Tags: Add Tag
No Tags, Be the first to tag this record!
Institution: Singapore Management University
Language: English
id sg-smu-ink.sol_research-5961
record_format dspace
spelling sg-smu-ink.sol_research-59612022-11-03T06:21:11Z Japan’s love for derivative actions: Irrational behaviour and non-economic motives as rational explanations for shareholder litigation PUCHNIAK, Dan W. NAKAHIGASHI, Masafumi Not long ago, there was a consensus in the legal academy that the Japanese were irrational litigants. As the theory went, Japanese people would forgo litigating for financial gain because of a cultural obsession with maintaining social harmony. Based on this theory, it made perfect (but economically irrational) sense that Japanese shareholders let their U.S.-transplanted derivative action lay moribund for almost four post-war decades, while at the same time the derivative action was a staple of shareholder litigation in the United States.The 1980s brought a wave of law and economics to the scholarship of Japanese law, which largely discredited the cultural explanation for Japan's (economically irrational) reluctant litigant. In this new academic era, reasonable minds could disagree as to whether the efficiency of settlement or high cost of litigation explained the dearth of litigation in Japan. However, the assumption that the Japanese litigant was economically motivated and rational (i.e., that they would litigate only when the financial benefit from doing so exceeded the cost) was virtually beyond reproach.In the early 1990s, the number of derivative actions in Japan skyrocketed. Japanese shareholders suddenly found themselves as strange bedfellows with their American counterparts as the only shareholders of listed companies in the world that utilized the derivative action on a regular basis. This extraordinary change in the behavior of Japanese shareholders has largely been understood through the lens of the economically motivated and rational shareholder litigant.This Article challenges the assumption that the dramatic increase in Japanese derivative actions can be understood solely through the narrow lens of the economically motivated and rational shareholder. Using original empirical and case study evidence, this Article demonstrates that in Japan, neither shareholders nor attorneys stand to gain significant financial benefits from derivative actions. To the contrary, this Article suggests that the non-economic motives (i.e., political and environmental motives and veiled extortion) and irrational behavior of Japanese shareholders, (i.e., the use of inaccurate mental heuristics, self-serving bias, and herding behavior) are critical for providing an accurate explanation for one of the most dramatic increases in shareholder litigation in recent times. This revelation further suggests that the leading literature on shareholder litigation--which forms the basis for the current understanding of shareholder litigation in the United States--is flawed, as it overlooks the critically important role that non-economic motives and irrational behavior play in driving shareholder lawsuits. 2012-01-01T08:00:00Z text application/pdf https://ink.library.smu.edu.sg/sol_research/4003 https://ink.library.smu.edu.sg/context/sol_research/article/5961/viewcontent/japans_love.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Yong Pung How School Of Law eng Institutional Knowledge at Singapore Management University Asian Studies Transnational Law
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Asian Studies
Transnational Law
spellingShingle Asian Studies
Transnational Law
PUCHNIAK, Dan W.
NAKAHIGASHI, Masafumi
Japan’s love for derivative actions: Irrational behaviour and non-economic motives as rational explanations for shareholder litigation
description Not long ago, there was a consensus in the legal academy that the Japanese were irrational litigants. As the theory went, Japanese people would forgo litigating for financial gain because of a cultural obsession with maintaining social harmony. Based on this theory, it made perfect (but economically irrational) sense that Japanese shareholders let their U.S.-transplanted derivative action lay moribund for almost four post-war decades, while at the same time the derivative action was a staple of shareholder litigation in the United States.The 1980s brought a wave of law and economics to the scholarship of Japanese law, which largely discredited the cultural explanation for Japan's (economically irrational) reluctant litigant. In this new academic era, reasonable minds could disagree as to whether the efficiency of settlement or high cost of litigation explained the dearth of litigation in Japan. However, the assumption that the Japanese litigant was economically motivated and rational (i.e., that they would litigate only when the financial benefit from doing so exceeded the cost) was virtually beyond reproach.In the early 1990s, the number of derivative actions in Japan skyrocketed. Japanese shareholders suddenly found themselves as strange bedfellows with their American counterparts as the only shareholders of listed companies in the world that utilized the derivative action on a regular basis. This extraordinary change in the behavior of Japanese shareholders has largely been understood through the lens of the economically motivated and rational shareholder litigant.This Article challenges the assumption that the dramatic increase in Japanese derivative actions can be understood solely through the narrow lens of the economically motivated and rational shareholder. Using original empirical and case study evidence, this Article demonstrates that in Japan, neither shareholders nor attorneys stand to gain significant financial benefits from derivative actions. To the contrary, this Article suggests that the non-economic motives (i.e., political and environmental motives and veiled extortion) and irrational behavior of Japanese shareholders, (i.e., the use of inaccurate mental heuristics, self-serving bias, and herding behavior) are critical for providing an accurate explanation for one of the most dramatic increases in shareholder litigation in recent times. This revelation further suggests that the leading literature on shareholder litigation--which forms the basis for the current understanding of shareholder litigation in the United States--is flawed, as it overlooks the critically important role that non-economic motives and irrational behavior play in driving shareholder lawsuits.
format text
author PUCHNIAK, Dan W.
NAKAHIGASHI, Masafumi
author_facet PUCHNIAK, Dan W.
NAKAHIGASHI, Masafumi
author_sort PUCHNIAK, Dan W.
title Japan’s love for derivative actions: Irrational behaviour and non-economic motives as rational explanations for shareholder litigation
title_short Japan’s love for derivative actions: Irrational behaviour and non-economic motives as rational explanations for shareholder litigation
title_full Japan’s love for derivative actions: Irrational behaviour and non-economic motives as rational explanations for shareholder litigation
title_fullStr Japan’s love for derivative actions: Irrational behaviour and non-economic motives as rational explanations for shareholder litigation
title_full_unstemmed Japan’s love for derivative actions: Irrational behaviour and non-economic motives as rational explanations for shareholder litigation
title_sort japan’s love for derivative actions: irrational behaviour and non-economic motives as rational explanations for shareholder litigation
publisher Institutional Knowledge at Singapore Management University
publishDate 2012
url https://ink.library.smu.edu.sg/sol_research/4003
https://ink.library.smu.edu.sg/context/sol_research/article/5961/viewcontent/japans_love.pdf
_version_ 1770576363573477376