Institutional Design, Outside Director Effectiveness, and Stock Price Crash Risk: Evidence from Japan's 2015 Hybrid Board Reform*

Abstract This study investigates the effect of a hybrid board structure that combines Anglo‐American principles with traditional Japanese practices on stock price crash risk. The 2015 amendment to Japan's Companies Act introduced the Audit and Supervisory Committee (ASC) structure, designed to strengthen outside directors' effectiveness through enhanced statutory authority, improved information access, and greater influence over board decisions. Using panel data from Japanese listed firms from 2013 to 2019 and employing a difference‐in‐differences approach, this study finds that ASC adoption significantly reduces future crash risk. This effect is more pronounced in firms with higher board independence and those with female outside directors, which benefit more from the institutional advantages of ASC adoption. However, the “unnatural selection” of outside directors weakens this relationship, indicating that formal compliance alone is insufficient to improve governance outcomes. Overall, the findings suggest that hybrid board structures can achieve broad acceptance while enhancing the effectiveness of outside directors when tailored to local institutional contexts, offering practical guidance for reforms in insider‐dominated economies.