Nihon no seidotekiyouin ga riekichousei ni ataeru eikyou (The effect of Japanese institutional factors on earnings management)

The research topic of this book is in the area of accounting research called "earnings management". Without fear of misinterpretation, earnings management in this context may be legitimate earnings manipulation. Because accounting earnings are calculated based on accounting standards, many people may think that accounting earnings are a true indication of a company's business performance. However, current accounting standards allow management some discretion in the process of calculating accounting earnings. Therefore, management has the ability to adjust accounting earnings as it sees fit. For example, an airline company reportedly increased its ordinary income by approximately 19.2 billion yen by changing the useful life of aircraft depreciation and changing bond issuance costs from being fully expensed to being recorded as a deferred asset. This means that a company can generate nearly 20 billion yen in accounting earnings through an accounting manipulation that has nothing to do with actual business performance. Management decisions regarding earnings management have a significant impact on financial reporting.
 
The reporting of accounting income can have various economic consequences. For example, a deterioration in accounting earnings, such as a loss, can lead to employee restructuring or even layoffs by management. It may also cause management bonuses to be reduced or make it more difficult for the company to raise capital. Management is expected to make earnings management to avoid such adverse events. For example, management may engage in earnings management to increase earnings in order to increase the amount of bonuses they receive. The purpose of earnings management research is to empirically examine managers' motives for managing earnings in this way. In other words, hypotheses about managers' motives for earnings management are formulated and tested through empirical analysis.
 
This book examines the possibility of the existence of earnings management that is unique to Japanese firms. Specifically, we focus on the influence of institutional factors surrounding the firm on managers' earnings management. Institutional factors here refer to institutional characteristics that differ from country to country, such as legal systems for investor protection, tax systems, regulations, and the degree of development of the financial system. Earnings management may be constrained by the institutional factors in each country, or the institutional factors themselves may create new incentives for earnings management. This book focuses on the institutional factors of Japanese firms to elucidate the earnings management behavior created by Japan's unique institutional characteristics.
 
Although the empirical accounting research is not dominant in Japan, the findings on earnings management have been applied to stock investment and auditing practices in the United States. We hope you will find this book an interesting introduction to accounting.
 

(Written by SHUTO Akinobu, Associate Professor, Graduate School of Economics / 2023)