Securing Future and Current Pies for Payout and Impaired Asset Write-Offs: Evidence from Japan

• In Event: Concurrent Session 4.1: Financial Reporting and Disclosures

Abstract

The international comparison research on earnings attributes suggests that financial reporting outcomes are determined partly by reporting incentives. Previous studies, however, use aggregate measures such as net income and thus do not show which accounting procedures produce their results. Moreover, studies have argued that current-period accounting income tends to viewed as the pie for stakeholder payouts in countries with stakeholder governance and that, because the preferences of stakeholders penalize volatility in payouts and thus income, managers reduce income volatility either by using their discretion or through real activities.
This paper focuses on an income-decreasing accounting procedure—accounting for fixed asset impairment—to (indirectly) investigate the influence of reporting incentives created by an economy’s institutional structure on financial reporting outcomes. This study uses data from Japanese firms to examine the association between increases in earnings and impaired asset write-offs. It also examines whether this association is different for stable and increased dividend firms (SI firms) and no and decreased dividend firms (ND firms). Unlike a study using data from US firms, it finds that, on average, impaired asset write-offs are positively associated with unexpectedly high increases in earnings, suggesting that reporting incentives in the US and Japan affect write-offs. This study also finds that write-offs for SI firms are positively associated with unexpectedly high increases in earnings, whereas this is not the case for ND firms; the difference is statistically significant. The importance of dividends for Japanese firms thus appears to lead to this association. These results are consistent with the international comparison research on earnings attributes.
This paper contributes to the literature on the “new institutional accounting.” The individual and aggregate costs of uniform global regulations on firms, investors, and other stakeholders are often neither recognized nor discussed. This paper shows that managers of Japanese firms use the discretion accounting standards give them when an accounting standard similar to IFRS and US standards is introduced to a country where inside communication relatively solves an information asymmetry. Although the study does not directly investigate the costs that accounting standards impose on stakeholders, it implies that, as managers are rational, implementing the standard is costly for them. This paper also contributes to the literature on earnings attributes and has implications for standard setters.

Author

• Keishi Fujiyama, Hitotsubashi University