FIN-02-053 |
NYU Stern School of Business |
Idiosyncratic Risk and Creative Destruction in Japan
November 2002
Yasushi Hamao, Jianping Mei, and Yexiao Xu
ABSTRACT
The dramatic rise and fall of the Japanese equity market provides a unique opportunity to
examine market-and firm-specific risks over different market conditions. The price
behavior of Japanese equities in the 1990s is found to resemble that of U.S. equities
during the Great Depression. Both show increasing market volatility and a prolonged
large co-movement in equity prices. What is unique about the Japanese case is the
surprising fall in firm-level volatility and turnover in Japanese stocks after its market
crash in 1990. This large decrease in firm-level volatility may have impeded Japan’s
capital formation process as it has become more difficult over the past decade for both
investors and managers to separate high quality from low quality firms. Using data on
firm performance fundamentals and corporate bankruptcies, we show that the fall in firm-level
volatility and turnover could be attributed to the sharp increase in earnings
homogeneity among Japanese firms and the lack of corporate restructuring.
Yasushi Hamao
Institution: Marshall School of Business, University of Southern California
Telephone: (213) 740-0822
Email:hamao@usc.edu
Jianping Mei
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0354
Fax: (212) 995-4221
Email: jmei@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~jmei
Yexiao Xu
Institution: School of Management, University of Texas at Dallas
Telephone: (972) 883-6703
Email:yexiaoxu@utdallas.edu
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