Institutional and foreign ownership vis-à-vis default risk: Evidence from Japanese firms

Using a sample of 2902 listed non-financial firms over the period 2004 to 2017 and recently available Nikkei NEEDS CGES database, this study provides the first comprehensive and robust evidence on the association between ownership structure and default risk in the Japanese setting. Consistent with the wealth redistribution hypothesis, results show a positive relationship of institutional and foreign shareholdings with default risk. These findings are robust to an alternative proxy of default risk, and to endogeneity bias. Additionally, we provide evidence that the positive association of institutional and foreign ownership on default risk is driven by the main bank relationship, ownership instability, stock illiquidity, cross-shareholdings and non-ADRs. Our findings are generalizable to the wider economy and have practical implications for risk management.