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Strategic investments in Japanese corporations: do foreign portfolio owners foster underinvestment or appropriate investment?
Author(s) -
David Parthiban,
Yoshikawa Toru,
Chari Murali D. R.,
Rasheed Abdul A.
Publication year - 2006
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.523
Subject(s) - portfolio , business , foreign ownership , sample (material) , portfolio investment , foreign direct investment , finance , economics , chemistry , chromatography , macroeconomics
This paper investigates the effect of foreign ownership on strategic investments in Japanese corporations. Foreign owners are typically portfolio investors who frequently buy and sell shares and hold diversified portfolios of small stakes in many firms. Prior research has presented two conflicting perspectives on the role of such investors: (a) their frequent trading leads to pressure for short‐term returns that fosters underinvestment ; (b) their active trading fosters appropriate investments . We investigated the relationship between foreign ownership and strategic investments using dynamic panel data analysis of a sample of 146 Japanese manufacturing firms from 1991 to 1997. We found that foreign ownership enhances strategic investments (in R&D and capital intensity) to a greater extent when firms have growth opportunities than when they lack such opportunities. We conclude that foreign ownership fosters appropriate investment. Copyright © 2006 John Wiley & Sons, Ltd.