Does engagement by large asset managers enhance governance of target firms?

We examine the motivations for and effects of institutional investor engagements in Ja-pan using proprietary data of three large asset managers from 2017 to 2019, when demand for responsible investment spiked in response to the revised Stewardship Code of 2017. Our statistical analysis of over 3000 engagement datasets reveals that investors engage with firms with poor governance when they have high stakes in the firms. Further, target firms improve governance and financial performance in the post-engagement period. Thus, in Japan, where historically, investors have not been active in engagement activities, investor engagement can be effective under an appropriate regulatory environment.