Foreign ownership and foreign directors – the effects on firm performance in Japan

Abstract: The purpose of this thesis is to analyze whether internationalization affects firm performance in Japanese firms. Internationalization is examined through the degree of foreign ownership and the inclusion of one or more outsider foreign directors. The Methodology that was applied is based around two fixed effects panel data regressions where firm performance, measured in Tobin’s Q and ROA, is the dependent variable. Firm performance is regressed against the share of foreign ownership, the inclusion of one or more outsider foreign directors and various control variables. The theoretical framework consists of previous research on foreign directors, foreign ownership and their effects on firm performance. Furthermore, the effects from the convergence of the conventional Japanese corporate governance system with the Anglo-American model is discussed. The study is based on a sample of 250 firms from the Tokyo stock exchange’s first section between 2010 and 2013, amounting to a total of 1000 observations. The findings suggest that internationalization has a significant, positive effect on firm performance. When Tobin’s Q is used as a measure for firm performance both foreign directors and foreign ownership yield positive effects. For the ROA regression on the other hand, only foreign ownership is shown to add a significant positive effect. ROA as a measurement of firm performance is suggested to be less suitable for capturing positive signaling effects that might stem from including foreign directors. This is advocated to explain the non-significance.