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In this book we analyze the impact of the evolution of the Tokyo Stock Exchange (TSE), at the same time discussing reforms in stock trading by related accounting standards and legal regulations.



1. Introduction to the Trading System at the Tokyo Stock Exchange

In Chapter 1 we provide an overview of trading at the First and Second Sections of the Tokyo Stock Exchange. We discuss how investors can send bid-ask orders to the TSE and outline how these orders are executed. We also explained the arrowhead trading system, implemented January 2010; by reading our example of the market clearing process, readers should become familiar with TSE trading systems. Then we summarize relevant financial characteristics of the firms listed on both sections of the TSE.
Keiichi Kubota, Hitoshi Takehara

2. Reform and Deregulation of Financial Markets in Japan: Evolution of Law and Accounting Standards

In November 1996 Prime Minister Ryutaro Hashimoto proposed deregulating Japanese financial markets in banking, securities, and insurance. He called this movement the Japanese version of the “Big Bang,” an earlier deregulation effort by the United Kingdom government.
In Chapter 2 we give an overview of recent developments in financial regulation, law, accounting standards, and TSE disclosure rules; we also highlighted the crucial items related to the empirical analyses in the next four chapters.
For the reader who is not familiar with mechanisms of Japanese capital markets, the chapter provides a clear and comprehensive introduction to Japanese financial markets.
Keiichi Kubota, Hitoshi Takehara

3. Market Microstructure and Information Asymmetry Variables: The Behavior of TSE Stocks

In Chapter 3 we begin our discussion by introducing the basic concepts used in analyzing price discovery processes and we define the market microstructure variables used in Chapters 5 and 6. The first part of the chapter defines and explains information asymmetry and liquidity-related variables. By using these variables, we gain a bird’s-eye view of the Tokyo Stock Exchange, focusing on the changes that arose during the launch of the arrowhead system. We also refer the reader to the Chapter 3 Appendix, which explains the minimum required level of market microstructure measures used in this book.
Keiichi Kubota, Hitoshi Takehara

4. Risk and Return on the Tokyo Stock Exchange

In Chapter 4 we compare three kinds of asset-pricing models, as proposed by Fama and French, Carhart, and Pastor and Stambaugh. The results of the Fama and MacBeth regressions and the GMM test suggest that all candidate risk factors are associated with Tokyo Stock Exchange long-run stock returns.
As to sub-periods we find the Fama and French model can well explain the cross-sectional variations of Japanese stocks, especially in the 1980s. However, after the arrowhead launch the HML factor was no longer significant, while Pastor and Stambaugh’s liquidity innovation factor became significant.
The result suggests the possibility that the launch of the arrowhead trading system at the TSE in January 2010 drastically changed the asset pricing structure, liquidity, and information asymmetry of the stocks listed on the Tokyo Stock Exchange.
Keiichi Kubota, Hitoshi Takehara

5. Impact of TSE Quarterly Disclosure on Information Asymmetry

In Chapter 5 we detail the new quarterly reporting requirement issued by the TSE for firms listed on its First and Second Sections. We demonstrate that good firms responded by disclosing, while bad firms did not; this forms an interesting case of separating equilibrium.
We also find that after this requirement was issued the liquidity and information asymmetry of listed stocks declined overall. However, it is hard to identify which factor had the greatest effect on the reduction of information asymmetry and market illiquidity, because many reforms were implemented in accounting standards and other stock exchange regulations during that time.
Keiichi Kubota, Hitoshi Takehara

6. Price Discovery Process Before and After the Introduction of the “arrowhead” Trading System at the Tokyo Stock Exchange

In Chapter 6 we investigate the impact of the introduction of the arrowhead trading system introduced on January 4, 2010 at the Tokyo Stock Exchange (Tokyo Stock Exchange, 2014).
As we study the analyses based on our two hypotheses, we find a twofold pattern in these changes, depending on the market size of stocks. That is, among large-cap stocks, trading costs dramatically decreased, most likely as a result of order slicing by institutional investors and HFTs. But among small-cap stocks, that change was not so large.
When we look at asset pricing using the Fama and MacBeth test, we find that information asymmetry became a significant variable among large-cap stocks, whereas and the liquidity and/or trading cost effects are more pronounced among small-cap stocks.
Keiichi Kubota, Hitoshi Takehara


We hope that this book has helped the reader comprehend the impact of TSE reforms and other related regulations and deregulations upon the price discovery process of TSE stocks.
Keiichi Kubota, Hitoshi Takehara


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