Earnings management in Japanese companies

Abstract

This study examines choices of accounting accruals using a large sample of Japanese companies, which operate in an environment that is generally regarded as being rather different from the United States. We find that debt-to-equity and asset hypotheses hold in the Japanese environment only for the years after the market crash of 1990. Prior to the crash, the number of employees seems to capture the political (or economic) pressure. Similar to their U.S. counterparts, managers of Japanese companies chose income-increasing accounting accruals to increase their bonus and increase the amount of outside funding. The ownership effect was also observed on the choice of accounting accruals. Those companies that have higher degrees of ownerships by trust companies and stock brokers have incentives to choose income-increasing accruals to provide a more positive picture of the firm. Since this incentive does not exist for ownership by financial institutions, the opposite effect was observed. The effect of ownership by individual investors, management, or corporations on the choice of income-increasing accruals was opposite to that hypothesized in 1989. These opposite-to-expected effects were not present after the Japanese market crash. The stock market crash of 1990 appears to have had a profound effect on the choices of accounting accruals.