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Towards the market that rewards investors

2022.01.11

Akiyoshi Oba

Akiyoshi Oba

Chairman, Japan Investment Advisers Association

Towards the market that rewards investors
Akiyoshi Oba

Akiyoshi Oba

Chairman, Japan Investment Advisers Association

The Tokyo Stock Exchange announced the restructuring of market segments. The objective of this market restructuring would be the improvement of the infrastructure to ensure mid- to long term returns to investors by sustainably increasing corporate value of listed companies. I would like to emphasize that the core concept of this market reform is drawn from the perspective of making a shift “towards the market that rewards investors.” Because currently, pension funds, including the GPIF, comprise a large percentage of investors, while many people may consider that investors are mainly “rich people”.

In the capitalist market economy, an economic entity that creates value is a listed company. From the investors’ viewpoint, unless a listed company fulfills at least the following three requirements, it will not be an attractive investment target.

First, companies should earn profits that exceed the cost of capital. This is an important requirement. If a company fails to do so, its corporate value will not increase. More simply put, its stock price will not rise. Unfortunately, during 30 years of Heisei Era, only a certain number of companies have fulfilled these requirements, while the number of delisted companies is limited. Under such circumstances, investors are not rewarded.

The second requirement is timely and appropriate information disclosure. Recently, the Stewardship Code and the Corporate Governance Code have placed an emphasis on constructive dialogue between companies and investors. Yet, without appropriate disclosure, it will be impossible to have fact-based dialogue.

The third requirement is to secure liquidity. If parent-subsidiary listings or cross-shareholdings cause a lack of liquidity, investors will face constraints, so they will become reluctant to make investments.

Unless listed companies satisfy at least these conditions, investors will not consider them attractive. “Unless investors are rewarded, the capital market will not be developed.” These are words of wisdom from Joseph Stiglitz. This is a perfect phrase to describe the requirement for the capital market development. It can be said that the U.S. capital market satisfies this condition. I assume that, since investors are rewarded over the mid to long term, the market attracts investment money from all over the world. I would like to repeat that this market restructuring is intended to rebuild the infrastructure that creates a virtuous cycle where listed companies strengthen their ability to create value, and thereby become more attractive investment options, which provide a return to investors. With the market reform, I hope to see continuous reform efforts “towards the market that rewards investors”, taking Stiglitz’s words into account.

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