Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration at Harvard Business School; Akash Chattopadhyay is an Assistant Professor of Accounting at University of Toronto Mississauga and the Rotman School of Management; and Matthew Shaffer is a doctoral student at Harvard Business School. This post is based on a recent paper by Professor Chattopadhyay, Mr. Shaffer, and Professor Wang.
There is growing interest in using stock indexes to shape corporate behavior and the standards of corporate governance. Over the past weeks, two of the largest index providers—S&P Dow Jones and FTSE Russell—announced their decisions to exclude certain firms with multiple share-class structures from their indexes. Despite these significant moves, empirical research has not established whether and how stock indexes can be effective in shaping standards of corporate behavior.
In a new working paper recently posted on SSRN, Governance through Shame and Aspiration: Index Creation and Corporate Behavior in Japan, we examine the governance role of stock indexes by exploiting the unique features of Japan’s JPX-Nikkei 400 index (JPX400). Launched in 2014, the JPX400 consists of the 400 best performing firms in terms of profitability among Japan’s largest and most liquid firms. Our analysis shows that the index had profound effects on Japanese firms and the overall stock market, and that these effects were predominantly driven by managers’ prestige concerns—the aspiration to acquire prestige or the desire to avoid shame—rather than the financial benefits of index inclusion.
