Corporate Governance Compliance and Herding

We show the corporate governance reforms introduced by the Japanese government since 2014 have not succeeded in increasing aggregate firm value. These policies, of which voluntary disclosure in the form of ‘comply or explain’ is a major element, have inadvertently led to overcompliance by target firms listed in the first section of the Tokyo Stock Exchange as well as a range of non-target firms. This results in smaller firms, which are typically not listed on the first section of the exchange, following the compliance behaviour of larger firms listed on the first section in the same industry sector. Importantly, this pressure to follow in the steps of leading firms is to the detriment of board effectiveness and shareholder value. We document a larger reduction in the market value of young and R&D intensive firms, and firms appointing outsider directors with lower advising quality. We posit this overcompliance behaviour is, inter alia, correlated with the cultural values of ‘conformity’, ‘respect for authority’ and ‘power distance’, which permeate the Japanese corporate culture. These findings highlight the risks in adopting corporate governance policies without sufficient attention to contextual factors.