N°25-19: Reputational Shocks and Capital Market Responses: The Tokyo Stock Exchange Capital Efficiency Initiative

Following the 2023–2024 Tokyo Stock Exchange (TSE) initiatives to improve capital efficiency, investors favored low price-to-book (PBR) firms, particularly those with high return on equity (ROE). These effects are concentrated among persistently undervalued firms, increase smoothly with the degree of undervaluation rather than jumping at the regulatory threshold, and are robust to endogenous treatment assignment. Although firms' value-enhancing plans were already publicly available in corporate governance reports, the TSE's consolidated compliance list triggered strong market reactions. We find no short-run improvements in realized profitability or upward revisions in analyst earnings forecasts, but significant declines in illiquidity among low PBR firms. The evidence suggests that the reform prompted investor-side repricing of chronic undervaluation rather than immediate changes in firm behavior.