Isaka Naoto

In this study, I analyze the optimal choice of a board of directors using a theoretical model. In my model, shareholders choose either an informed board that can bring additional private information to the firm or an uninformed board that merely considers the inside information already available within the firm. Then, the board randomly chooses a good chief executive officer (CEO) who has inside information or a bad CEO without such information. Next, the CEO decides whether to consult with the board when making a project decision. I show that shareholders generally choose an informed board in order to maximize the firm's value by utilizing the private information available to the board. However, shareholders optimally select an uninformed board if the CEO is reluctant to communicate with an informed board out of fear that it will reject his/her decisions. The uninformed board is also optimal when it derives a sufficiently large private benefit from monitoring the CEO, the cost of choosing the informed board is large, or the firm is involved in many unrelated businesses, especially when the inside information is valuable and many outsiders are needed to observe useful outside information. Some of these implications are used to discuss recent trends in the board structures of Japanese firms.

Abstract We examine empirically the long-run effects of reductions in minimum trading units (MTU) on stock prices in Japan from October 2001 to May 2008. When firms reduce their MTU, the number of individual shareholders tends to increase significantly for several years. We estimate buy-and-hold abnormal returns and find that positive stock returns are observed not only for the period between the announcement day and the actual date of MTU decreases, but also for a period of several years following MTU reductions. In addition, we measure stock price reactions to the release of public information before and after MTU reductions and find that stock prices react less to the release of positive information and more to the release of negative information after the MTU reductions. These findings, together with evidence of the change in the short and long positions of investors after the MTU reductions, indicate that individual investors face short-sales constraints.

Using a database of stock lending fees for Japanese centralized margin transactions, I show that short-sales constraints reduce the adjustment speed of stock prices to negative information before the announcements of revised earnings forecasts disclosed by firms in the Tokyo Stock Exchange from July 1998 to December 2001. I find that the cumulative abnormal returns (CARs) of the stocks with high short-sales costs are insensitive to negative information on pre-announcement days, but the CARs of these stocks become significantly lower than the CARs of the stocks with low short-sales costs when the announcements reveal negative information to the public. © 2007 The Southern Finance Association and the Southwestern Finance Association.