More Misconceptions about Japanese Equities

June 20, 2023
By Knowledge Leaders Team in Economy, Markets

Continuing last week’s discussion on the role of minority interest in Japanese equity returns, below we perform the same correlation test on universes of DM Americas and EMEA companies. To recap, we tested the following metrics, drawn from each company’s fiscal year-end reports and stated in USD, and correlated them with the percent price return in local currency over the past five years.

  • -Accumulated minority interest as a percentage of total capital and of total assets.
  • -The percentage of shares outstanding closely held (by insiders, institutions, etc.).
  • -Minority interest expense as a percentage of cost of goods sold.
  • -Equity in affiliate income as a percentage of sales.

The hypotheses for our test were as follows:

H0 (null hypothesis): There is no statistically significant correlation between a given financial metric and five-year % price return. This would be verified by a correlation’s P-value above 0.05.

H1 (alternate hypothesis): A given financial metric has a statistically significant correlation with price returns. A correlation P-value below 0.05 would identify a given correlation as likely statistically significant and would be cause for rejecting the null hypothesis for a given metric.

As a little stats refresher, the p-value of a statistical hypothesis test is the likelihood that the null hypothesis is correct. Standard practice is to reject the null hypothesis if the p-value for any metric is below 0.05.

Looking at the results of these tests, we drew the conclusion that Yen-denominated price returns on mid- and large-cap Japanese companies over the past five years were statistically unrelated to the metrics we tested. It is important to note that not all the companies tested had non-zero values for the metrics we tested. The following table breaks down the percentage of companies that had values greater than zero for each item, by area.

As you can see, the minority interest phenomenon is relatively prevalent in Japan, significantly more so than in the DM Americas universe we tested. Interestingly, it appears to be even more prominent among the DM EMEA companies tested.

With that said, here are the results from the correlations tested, using financial statement data from the most recent fiscal year-end report for each company. The data used for testing was updated as of 6/16/23.

Once again, there is no statistically significant correlation to be found here. Of all the metrics tested, none appear to provide significant insight into price performance, no matter the region.

Where this gets especially interesting, however, is when we run the same test on financial statement data from five fiscal years ago.

Our analysis suggests that while insider shareholding has no significant impact on the price performance of Japanese equities, the same does not hold for American and EMEA companies. While the correlation is a relatively weak one, the five-year percent price return of mid- and large-cap DM Americas and DM EMEA stocks does in fact have a statistically significant correlation with insider ownership. So, while all the theorizing about this issue has been focused on Japan lately, what we see here suggests that it is actually DM EMEA and Americas companies that are more impacted by this phenomenon.



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