Abstract
Comparative international research on earnings attributes suggests that financial reporting outcomes are partly determined by reporting incentives. Moreover, studies have argued that current-period accounting income tends to be viewed as the pie for stakeholder payouts in countries with stakeholder governance and that, because of the payout preferences of stakeholders, managers tend to reduce income volatility in these countries, either by using their discretion or through real activities. This study focuses on accounting for fixed asset impairment and indirectly investigates the influence of reporting incentives created by an economy’s institutional structures on financial reporting outcomes. It examines whether Japanese firms use discretion and other accounting techniques when recording impaired asset write-offs. It also examines whether these accounting behaviors are different for stable and increased dividend firms and no dividend and decreased dividend firms. Unlike a study using data from US firms, it provides evidence on income-smoothing behaviors, focusing on Japanese firms, and suggests that reporting incentives in the United States and Japan affect write-offs. This study also finds that this is true for stable and increased dividend firms, but is not the case for no dividend and decreased dividend firms. This suggests that the importance of dividends among Japanese firms affects their behaviors.
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Notes
- 1.
Note that 66.2 % of Japanese firms preferred the stable dividend policy in 2008, that is, before the financial crisis, suggesting that this preference increased because of the crisis.
- 2.
Moreover, before the crisis, only 20.9 % of investors in Japan favored the stable dividend policy.
- 3.
- 4.
I do not argue that accounting standards with timely loss recognition are not necessary but, rather, that the costs of such accounting standards must be recognized. Even in Japan, the increasing participation of shareholders in corporate governance may spark a demand for timely loss recognition.
- 5.
Most Japanese firms emphasized the use of unconsolidated income statements until the late 1990s because they were used to calculating distributable profits. Japanese firms are now permitted to calculate the profits based on their consolidated income statements.
- 6.
Note that tax payment is not considered here.
- 7.
One of the most widely read economic newspapers in Japan.
- 8.
NSC reduced its dividend payouts owing to massive restructuring and the downturn in the East Asian economy in 1999.
- 9.
The NSC group promoted this reduction until 2004.
- 10.
Ahmadjian and Robinson (2001) argue that downsizing in the 1990s effectively deinstitutionalized permanent employment.
- 11.
NSC adopted accounting for fixed asset impairment in 2004, and its write-offs are all related to real estate.
- 12.
Rather, the distribution to labor increased during Japan’s “lost decade.”
- 13.
Riedl (2004) uses a variable equal to the change in a firm i’s pre-write-off earnings from period t − 1 to t, divided by total assets at the end of t − 1 when above the median of nonzero positive values of this variable, and equal to 0 otherwise. Hu and Kurumado (2012) use an indicator variable equal to 1 when the change in a firm i’s pre-write-off earnings from period t − 1 to t, divided by total assets at the end of t − 1, is above the median of nonzero positive values of this variable, and equal to 0 otherwise. Riedl (2004) indicates that a coefficient from a Tobit regression includes two components: the write-off amount and the write-off decision. Therefore, I use a variable that captures the amounts of write-offs to consider these amounts and compare the results of this study to those of Riedl (2004).
- 14.
The reasons for introducing this standard in Japan are (1) to ensure convergence in Japanese and US accounting standards and the IFRS and (2) to resolve the problem of overstating carrying amounts of fixed assets.
- 15.
Riedl (2004) may view income smoothing as downward earnings management at the time of increased earnings, as he states that managers manage earnings because the reduction in positive earnings surprise leads to greater inferred perception of the reported earnings construct. This study also considers the phenomenon of managers managing earnings upward at the time of recording impaired asset write-offs. Therefore, the terms “income smoothing” and “smoothing earnings” are used here to indicate the phenomenon whereby managers record impaired asset write-offs to decrease high increases in earnings.
- 16.
For Japanese firms, the difficulty of dismissal may be a more appropriate explanation for income-smoothing strategies than the existence of strong labor unions. Strong labor unions can affect income-smoothing practices, but despite the fear of strengthening the negotiating positions of labor unions (Garcia Lara et al. 2005), Japanese firms face greater difficulties in dismissal owing to the doctrine of the abuse of rights of dismissal, as established by case law. Moreover, impaired asset write-offs are not strongly linked with taxation in Japan, as the calculation of taxes excludes the account of impaired asset write-offs. Therefore, managers in Japan may have fewer incentives to reduce earnings for tax purposes than managers in countries with strong links between write-offs and taxation.
- 17.
- 18.
I do not argue that the dividend payout explanation is only a single driving factor of the phenomenon, but that investigating Japanese firms highlights the effects of dividend payout convention.
- 19.
Riedl (2004) also examines the debt-covenant hypothesis. However, the cost of violating debt covenants is low (Nakamura 2011), and thus this study does not include the covenant variable. In addition, in accordance with Yamamoto (2005), who argues that income-smoothing behavior is due to the main-bank system, this study also conducts an analysis that includes a debt-to-equity ratio variable. The coefficient of the variable is not statistically significant, and does not affect the results for other variables.
- 20.
- 21.
The fiscal year-end of most Japanese firms (approximately 80 %) is in March.
- 22.
- 23.
I also conduct analyses based on the samples that replace and exclude observations whose Impairment it is less than 0.001 and 0.003. The same inferences are obtained from those two analyses.
- 24.
Note that Riedl (2004) uses the change in pre-write-off earnings instead of ΔOI, the change in operating income.
- 25.
Hu and Kurumado (2012) find that the coefficient of ΔMGT_in is statistically significant at the 10 % level. However, they include “immaterial” impaired asset write-offs and focus on large and established firms listed in Tokyo Stock Exchange Section One. I exclude immaterial write-offs and include only material write-offs, which affect firms’ performance. I also include small and non-established firms listed on stock exchanges other than the TSE Section One.
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Acknowledgments
I thank Yasuharu Aoki, Eiko Arata, Daniel W. Collins, Hironori Fukukawa, David Godsell, Tetsuyuki Kagaya, Edward Riedl, Tomohiro Suzuki, Satoshi Taguchi, participants at the 19th AAA IAS Midyear Meeting and the 36th European Accounting Association Annual Congress, and workshop participants at Hitotsubashi University for helpful comments; Global COE Program “Innovation in the Japanese Corporation—Education and Research Center for Empirical Management Studies,” MEXT, for financial support. Any errors are my responsibility.
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Fujiyama, K. (2014). The Influence of Informal Institutions on Impaired Asset Write-Offs: Securing Future and Current Pies for Payouts in Japan. In: Ito, K., Nakano, M. (eds) International Perspectives on Accounting and Corporate Behavior. Advances in Japanese Business and Economics, vol 6. Springer, Tokyo. https://doi.org/10.1007/978-4-431-54792-1_8
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