1. Two Years Since TSE's Request for Management Awareness of Capital Costs and Stock Prices

At the end of March 2023, the Tokyo Stock Exchange (TSE) asked all companies listed on the Prime and Standard Markets to take measures to ensure awareness of capital costs and stock prices. Specifically, this involves three main steps: (1) conducting a current status analysis, (2) formulating and disclosing plans, and (3) executing initiatives. This process must be reviewed and updated annually (at least once a year) to provide progress updates.

To enhance the effectiveness of these initiatives, TSE has implemented measures over the past two years to support companies in their efforts. These measures include: (1) publication of a list of disclosing companies (starting monthly from January 2024), (2) release of key points and collections of best practice disclosures (February 2024), (3) Updates to disclosure examples highlighting gaps from investors' perspectives (November 2024), and (4) revisions of the list of disclosing companies (January 2025).

TSE places particular importance on fostering dialogue between companies and investors through disclosures. Through these dialogues, companies can refine their initiatives, enhance their disclosures, and ultimately create a virtuous cycle where they are positively evaluated by investors.

2. Effectiveness verified by TSE in terms of stock price trends

TSE presented stock price trends after the request (Material 1) to the "Follow-up Meeting on the Review of Market Segments" (Note 1) held at the end of October 2024.

Material 1: Trend in stock prices after TSE’s request (Prime market 2023.3.31～2024.9.30)

Source: Extract from TSE publication

Material 1: Trend in stock prices after TSE’s request (Prime market 2023.3.31～2024.9.30)

Source: Extract from TSE publication

The graph shows that until the end of September 2024, companies that disclosed their responses to TSE's request showed greater stock price increases compared to those that had not disclosed or were still considering disclosure. The stock price increase of companies listed by the TSE as best practice cases in their disclosure collection was particularly notable. The more companies disclosed their responses to TSE requests, especially through best-practice disclosures, the higher their stock prices. This graph can be seen as TSE’s attempt to show that responding to TSE requests is linked to market recognition.

However, the graph shows that all groups appear to exhibit similar stock price movements, differing only in the degree of the changes. DLRI confirmed the graph by replicating the method used to create it. For example, it was verified that on the historic stock market crash of August 5, 2024, the stock prices of the group of companies listed as best practice in TSE’s collection fell the most significantly among the four groups (Note 2). In other words, the group of companies listed in the best practice collection saw a significant rise in their stock prices during the overall upward market trend. Conversely, when the market enters a downtrend, these companies can expect to see their stock prices fall significantly. Thus, this does not necessarily mean that best practice companies will end up being highly valued in the market.

This may be related to the graph prepared by TSE only covering data until the end of September 2024. Observation over a longer period would be useful to study how the stock prices of these groups of companies change when the upward trend in stock prices subsides, falls, or reaches equilibrium.

3. Verification of TSE Initiatives Based on Recent stock price trends and personal views

Therefore, we extended the measurement period further and created a similar graph using the same method as the one used by the TSE, using data from the end of 2023 to March 31, 2025 (Material 2, Note 3).

Material 2: Trend in stock prices after TSE’s request (Prime market 2023.3.31～2025.3.31)

Source: Compiled by Dai-ichi Life Research Institute based on TSE and Bloomberg Data

Material 2: Trend in stock prices after TSE’s request (Prime market 2023.3.31～2025.3.31)

Source: Compiled by Dai-ichi Life Research Institute based on TSE and Bloomberg Data

Since the latter half of 2024, overall stock prices in the market have shifted from the previous upward trend to a phase characterized by mostly balanced conditions with some fluctuations. Despite the stock price decline at the end of March, the stock prices of companies recognized for best practices in TSE’s collection are on an upward trend, and the stock prices of the disclosed companies are also slightly up. In contrast, the stock prices of companies under consideration or undisclosed are slightly down.

Compared to the end of September 2024, the gap between the companies listed in TSE’s best practices collection, disclosed companies, and those under consideration or undisclosed has widened. In the previous chapter, it was suggested that companies listed in TSE’s best practices collection might have been more susceptible to market changes. However, when the period is extended, it is observed that their valuations have increased even if overall market stock prices have stagnated.

Of course, the disclosure of best practices is not the only factor supporting stock prices. Effective strategies and measures to improve corporate earnings are essential behind the disclosure, and the market is likely more interested in the actual situation of the company than in the disclosure itself. It is likely that the stock prices of companies listed in TSE's best practices collection would have risen regardless of the disclosure.

However, from the perspective of market mechanisms, it is clear that the significance lies in each company reflecting on their challenges through dialogue with investors and advancing efforts to enhance profitability in a manner that fits within their own governance frameworks. The stance of TSE can fundamentally be evaluated as correct, and it is important that many companies continue to advance better disclosures that reflect actual circumstances.

Currently, there are some doubts about the effectiveness of TSE's efforts, citing that stock prices or the PBR have not risen as before. However, this verification by DLRI can be said to confirm the effectiveness of TSE's efforts. With the recent revision of the disclosure list, companies wishing for active dialogue with investors can now clearly indicate this intent along with their contact information. Through active dialogues with investors aligned with their perspectives, companies can come up with effective strategies and measures tailored to their specific needs, enhance profitability, and subsequently raise stock prices. As a result, this can lead to the creation of a virtuous cycle that strengthens the overall capital market and economy of our country in the medium to long term. Lastly, it should be noted that investors also bear significant responsibility in creating this virtuous cycle.

Original in Japanese:
https://www.dlri.co.jp/report/ld/431392.html