After decades of both de-prioritizing shareholders’ economic interests and low corporate profitability, Japan introduced the JPX400 in 2014. The index highlighted the country’s “best-run” companies by annually selecting the 400 most profitable among Japan’s large and liquid firms. Index-inclusion incentives led firms to increase ROE proportionally by 41%, though firms did not realize significant capital-market or product-market benefits from inclusion. Status incentives contributed to the observed performance improvement. Back-of-the-envelope estimates suggest that JPX400-inclusion incentives accounted for 16% (20%) of the growth in aggregate earnings (market capitalization) over our sample period. Stock indexes can transform longstanding behavior via non-pecuniary channels.
William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance
Harvard Law School
Assistant Professor of Finance,
Wharton Finance, University of Pennsylvania
Glenn and Mary Jane Creamer Associate Professor of Business Administration, Harvard Business School