Governance Through Shame and Aspiration: Index Creation and Corporate Behavior

Akash  Chattopadhyay; Matthew D.  Shaffer; Charles C.Y. Wang

Article | Journal of Financial Economics | March 2020

Governance Through Shame and Aspiration: Index Creation and Corporate Behavior

by Akash Chattopadhyay, Matthew D. Shaffer and Charles C.Y. Wang

Abstract

After decades of deprioritizing shareholders' economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country's "best-run" companies by annually selecting the 400 most profitable of its large and liquid firms. We find that managers competed for inclusion in the index by significantly increasing ROE, and they did so at least in part due to their reputational or status concerns. The ROE increase was predominantly driven by improvements in margins, which were in turn partially driven by cutting R&D intensity. Our findings suggest that indexes can affect managerial behavior through reputational or status incentives.

Keywords: JPX-Nikkei 400 index; Status incentives; return on equity; capital efficiency; Social Norms; Index inclusion; Reputation incentives; Motivation and Incentives; Corporate Governance; Behavior; Investment Return; Status and Position; Japan;

Format: Print

58 pages

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Citation:

Chattopadhyay, Akash, Matthew D. Shaffer, and Charles C.Y. Wang. "Governance Through Shame and Aspiration: Index Creation and Corporate Behavior." Journal of Financial Economics 135, no. 3 (March 2020): 704–724.

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Governance Through Shame and Aspiration: Index Creation and Corporate Behavior

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