Foreign Ownership, Appointment of Independent Directors, and Firm Value: Evidence from Japanese Firms

We investigate the effects of foreign ownership on a key monitoring mechanism, the appointment of independent directors, for a sample of Japanese firms after the Tokyo Stock Exchange passed rules requiring appointment of at least one independent director or an independent statutory auditor. We find that foreign ownership is significantly positively associated with the appointment of independent directors and firm value respectively. We also find, using path analysis, that foreign ownership affects firm value via the appointment of independent directors. In robustness tests, we also examine whether foreign ownership affects a monitoring outcome (earnings management). We find that foreign ownership is significantly negatively related to benchmark beating using both accrual and real earnings management. Overall, our evidence suggests that despite their smaller shareholdings, foreign investors enhance firm value through improving monitoring of managers.