Over the past ten years there has been much discussion about whether corporate governance in Japan has improved and, if so, whether this results in improved corporate performance. We investigate whether observed changes in Japanese firms' cash holdings and payout policy are consistent with improved governance. To do this, we benchmark Japanese firms against U.S. firms. We find mixed evidence on whether Japanese governance has improved overall, in that, conditional on firm characteristics, the cash holdings of Japanese firms are still systematically higher than those of U.S. firms. There is evidence, however, of a strong increase in total payouts (dividends and repurchases) for Japanese firms, especially those that make repurchases. We also find that there is an inverse relation between changes in (excess) cash holdings and changes in performance for Japanese firms, consistent with improvements in governance being associated with improved performance. Further, we find that the market valuation of cash holdings was lower for Japanese firms than U.S. firms in the 1990s, which is indicative of poorer governance, but that this difference largely reverses in the 2000s. Overall, the evidence suggests that governance practices in Japan have improved for some firms, and that when governance does improve it is associated with improvements in performance and valuation.
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