2 days ago
Will US Exchanges Follow The Tokyo Stock Exchange (TSE)'s Lead In Nudging Chronic Underperformers?
Senso-Ji ancient buddhist temple illuminated at night in Asakusa. Senso-Ji is Tokyo's oldest and ... More most significant temple
The TSE asks firms with price to book (P/B) of less than 1 to publish turnaround plans. Around 23% of US firms have a P/B less than 1.
In March 2023, the Tokyo Stock Exchange (TSE) put out an interesting rule/nudge or guidance: companies on the TSE, whose P/B ratio was less than one, over multiple years, are encouraged to disclose, on an annual basis, information on specific initiatives to improve profitability and market valuation, as well as the schedule for their implementation. Companies risk delisting if these directives are not followed.
This is an intriguing nudge to get under-performers to publicly discuss plans for turning themselves around or for cash hoarders to buy back stock and/or payout dividends. The rule is especially pertinent to a market like Japan where shareholder activism is still at a nascent stage which in turn makes it becomes difficult for shareholder activists such an Elliott or a Trian to target such under-performers.
What is so special about P/B struggling at less than one for a while? No one ratio or metric is ever definitive. But, P/B < 1 is a quick and easy heuristic symptomatic of problems that deserve the CEO's and board's attention: (i) the company's future earnings stream does not even pay for the cost of equity held in the firm; (ii) the firm is sitting on assets over-valued in its books and the market is asking the firm to take a write down (a topic I had covered a while ago); (iii) the firm has negative debt (or cash in excess of debt) suggesting that is either under-levered or is better off returning cash to shareholders who can earn a higher rate of return than the firm can generate on cash, either held in marketable securities or invested in the business; or (iv) the firm is doing fine but the stock market has somehow not acknowledged its long term prospects.
The US, to some extent, has the same problem. I found 1,547 firms, out of 6,829 firms listed on major US exchanges (including mutual funds and class A and B shares and ADRs), that report a P/B ratio of less than one as of 6/30/2025. Of these, 756 are listed on the NYSE and the remaining 791 are on NASDAQ. Of the 1,547 firms, 1,007 trade at a price above $5 a share, suggesting that many of these firms are not trivially small.
Thus, 23% of US firms (1,547/6,829) or nearly a fourth of the sample have P/B ratio of less than one, despite the historical heights that US markets have scaled, of late. When I ran the same screen for the Tokyo Stock Exchange, I ended up with 1,668 firms out of a total of 4,333 firms (38%) with a P/B less than one. Yes, the proportion is higher for the TSE but a 23% number for US exchanges still sounds quite high to me.
Surprisingly, many prominent US listed firms report a P/B of less than one: Citibank, Baidu, Rogers Corporation, KB Home, General Motors, Molson Coors, United Bancshares, Arcelor Mittal, Fresh Del Monte Produce, Ziff Davis, Echostar, Honda Motor Company, Deutsche Bank, Harley Davidson, Foot Locker, Murphy Oil, Sirius XM, Barclays, Paramount, Ford Motor Company, Liberty Energy, several Invesco, Nuveen and Blackrock funds, Biovie, Kohl's, Clarivate, and Lloyds Banking Corporation.
Nearly a fourth of the market is simply too long a list for activists to go after, even in the US, setting aside any considerations of a financial return to activism. I have highlighted how many of these firms potentially have an agency problem in that the board or the CEO is stuck and somehow unable to break the rut and the usual checks and balance such as relatively passive institutional holders, proxy advisors or even index makers such as S&P have not pressured them to turn things around.
When the usual checks and balances fail, can and should the exchange step in? Will US exchanges be willing to follow TSE's lead and announce a similar rule asking managers to share concrete plans for a turnaround?
Has the TSE's plan worked in Japan?
It might be too early to tell for sure but companies have started sharing concrete initiatives. For instance,
A lot of this looks and sounds like Financial Management 101 but it is not a bad idea to force CEOs and boards to acknowledge their laggard status and ask for concrete steps they plan on taking to improve return on shareholder capital.
What about enforcement? Aside from the threat of delisting, short-listing the P/B laggards could potentially spotlight these firms and on the margin, goad institutional investors, index providers, proxy advisors, sell side analysts and rating agencies to hold management's feet to the fire in making sure that the announced plans are followed through.
Will the NYSE and NASDAQ consider TSE's out-of-the-box idea to pull up chronic under-performers?
