N°25-19: Sticks, Carrots, and Investor Behavior: Evidence from Japan

Following the 2023-2024 Tokyo Stock Exchange (TSE) initiatives to improve capital efficiency, investors favored low price-to-book (PBR) firms, particularly those with high return on equity (ROE). Further analysis suggests that investors targeted untapped value rather than responding to mere "shame" effects, though they overlooked leverage differences across high-ROE firms. TSE also required firms to disclose plans to implement value-enhancing actions. Although the information which firms had provided such disclosures was previously known, the publication of a list of non-compliant firms triggered strong market reactions. These findings demonstrate reputation's role in investor behavior while highlighting investors' limitations in processing even easily available financial information.