EFFECTS OF THE LIABILITY OF NEWNESS ON FIRM BEHAVIOR AND PERFORMANCE : AN INVESTIGATION OF JAPANESE FIRMS

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It is often argued that Japanese firms operate their businesses within the relations of corporate networks. Although many well-established firms in fact belong to some corporate groups, there are also independent firms that do not have close associations with such groups. These independent firms tend to be relatively new compared to the well-established group firms and are sometimes still managed by the founders who hold equity stakes. While previous research on Japanese firms often focuses on large group firms, this paper examines the independent firms as they have not been paid as much attention as group firms. This study investigated the effects of the liability of newness on behavior and performance of Japanese firms. Specifically, this paper examined the relationships between firm age, group affiliation, corporate finance, stock ownership by the founder and foreign sales, ROA, and TSR. The results of analysis support the view that firm age and group affiliation affect a firm's propensity to rely on foreign markets. Further, it was found that heavy reliance on bank loans, stock ownership by the founder, and firm age were associated with profitability. We also found negative relations between reliance on bank loans, group affiliation, and TSR. These results are consistent with the view based on the liability of newness and resource dependence theory. For Japanese firms that were relatively new, it was difficult to penetrate the domestic market because of various disadvantages that arise from the liability of newness. That led these firms to enter foreign markets from the early stage. Group affiliated firms, on the other hand, did not have a strong incentive to seek foreign sales because they could rely on stable domestic sales. The results of this study suggest that these early experiences have strong and long-lasting effects on a firm's current behavior.

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