Melco Management Accounting Research
Discussion Paper Series
No.MDP2024-002

Management Forecasts in Japanese Multinational Enterprises

April 2024
Hideaki Sakawa
Nagoya City University
Naoki Watanabel*
Associate Professor, Nagoya City University, Graduate School of Economics
1, Yamanohata, Mizuho-cho,Mizuho-ku, Nagoya, 467-8501, Japane-mail: naoki-watanabe@econ.nagoya-cu.ac.
Junjian Gu
University of Tsukuba*Corresponding author

Maki Makoto Foundation
Nagoya, Japan
Discussion Paper Series of the Melco Management Accounting Research, in order to promote
the study of management accounting, has published this unfinished paper onto the Web. Pleaseobtain the permission of the author when citing this paper.

Management Forecasts in Japanese Multinational Enterprises

Hideaki Sakawa, Nagoya City University
Naoki Watanabel, Nagoya City University *Junjian Gu, University of Tsukuba*

Corresponding Author. Email; naoki-watanabe@econ.nagoya-cu.ac.

Abstract
The research problem:
This study investigates the degree of internationalization and disclosure quality of
mandatory management forecasts (MF) of Japanese multinational enterprises (MNEs).
Motivation or theoretical reasoning:
Investors in internationalized MNEs demand better disclosure under the complexity ofinternationalized geographical diversity. However, the research question remains as towhether internationalization affects disclosure quality, especially regarding MF. Our
research was conducted in a unique setting characterized by mandatory-effective MF
required in Japan, unlike in the United States, where voluntary MF are adequate.
The test of hypotheses:
This study tests whether the disclosure quality of mandatory MF is lower in highlyinternationalized MNEs. Additionally, we test whether foreign investors (FI) are
positively associated with better mandatory disclosure in highly internationalized
MNEs.
Target population:
The initial study sample comprised all non-financial firms listed on the Tokyo Stock
Exchange from 2007 to 2018. We obtained financial data, MF, and corporate ownershipfrom Data Solution and Astra Manager. Our final sample comprised 13,280 MNE-year
observations and 7,330 non-MNE-year observations.
Adopted methodology:We estimated the relationship between the disclosure quality of MF andinternationalization based on a multiple regression analysis. Additionally, we
considered endogeneity using 2SLS analysis.
Analyses:
Our dependent variables were the initial MF optimism, measured as the initial earnings
errors (Forecast Error), Forecast Accuracy as the absolute value of Forecast Error, andthe magnitude of forecast revisions (Magnitude). Our key independent variable was theinternationalization diversification proxy (Internationalization).
Findings:
Our empirical results showed that the disclosure quality of MF tends to be lower inhighly internationalized MNEs. This finding implies that the geographical complexityof internationalized MNEs lowers the disclosure quality of mandatory MF. Moreover,
we found that greater FI positively moderates the negative relationship between thedisclosure quality of MF and the degree of internationalization, suggesting that
disclosure pressure of FI enhances the quality of mandatory MF. Our study illustrates
how internationalization affects managerial disclosure quality and contributes to theunderstanding of the governance costs imposed by the complexities caused byinternationalization.
Keywords: internationalization; corporate governance (CG) ; comparative accounting
systems and practice; MNEs; FI

1. Introduction
Under financial globalization, institutional shareholders enhance disclosure
demands for greater accountability and transparency (Aggarwal et al., 2011; Boone &White, 2015). Firms attract FI with different national-level corporate governance (CG)logic (Aguilera et al., 2018). Thus, the CG of multinational enterprises (MNEs) is strongly
influenced by recent globalization trends (Aguilera et al., 2019). Well-functioning
accounting practices and CG mechanisms are complementary, and cross-national
differences in CG systems also affect accounting practices (Aguilera et al., 2021). Whilea growing interest in CG exists in MNEs, the accounting literature on MNEs remains
relatively scarce (Aguilera et al., 2021). Research on MNEs’ CG shows that the adoptionof accounting standards tends to progress when cross-national differences exist in CG
systems (Judge et al., 2010). In Japanese MNEs, adopting international accounting
standards has progressed in response to demands of FI (Sakawa et al., 2021). Additionally,
Japanese MNE managers face pressure from FI to achieve better disclosure (Aguilera etal., 2017). Owing to the increasingly varied demands of investors with increasing
geographical diversity, analysts face difficulty making higher-quality forecasts (Duru &Reeb, 2002). Therefore, investors in internationalized MNEs demand better disclosure
because of the complexity of internationalized geographical diversity. This raises theresearch question of whether internationalization affects the disclosure quality of MF,aligning with the accounting literature on MNEs.
From international CG (ICG) research perspective, shareholder-oriented CG in
the United States (U.S.) is remarkably different from that in Germany and Japan (Shleifer& Vishny, 1997). In such countries, bank–firm relationships, or the mechanism throughwhich banks monitor their client firms, are known to function effectively (Aguilera et al.,2008; Aoki et al., 1994; Yoshimori, 1995). However, with the rising financial
globalization trend, disclosure pressures from FI on the Japanese MNEs have increased(Aguilera et al., 2017; Sakawa & Watanabel, 2019; Sakawa et al., 2022).1
This study aimed to discover how internationalized MNEs realize better
disclosure of mandatory MF. MF play a central role in improving corporate disclosure(King et al., 1990). Additionally, the impact of FI on managerial reporting behavior instakeholder-oriented CG is critical for academics and practitioners (Aguilera et al., 2017).
Given this, the present study focused on assessing the disclosure quality of MF byexamining subsequent revisions of MF.
We intended to reveal how MNEs under stakeholder-oriented CG adapt topressures from FI accustomed to shareholder-oriented logic. Previous studies havefocused on managerial incentives to disclose forecasts in the U.S. (Skinner, 1994; Stocken,
2000). In U.S. corporations, MF are released voluntarily to avoid concerns about theenormous legal costs of false disclosures. Under China’s voluntary MF systems,
politically connected firms tend to issue fewer voluntary disclosures because of their
weaker disclosure incentives (Hung et al., 2018). In Japan, however, MF are mandatorily
released because of the relatively lower regulatory and legal costs of biased forecasts(Kato et al., 2009). Therefore, Japanese corporations’ MF are considered less biased anddiffer in how they are revised (Aguilera et al., 2017; Nagata & Nguyen, 2017). Effectively
mandated MF in Japanese corporations mitigate information asymmetry between
managers and outside shareholders (Kato et al., 2009). Listed companies are expected to
1

The increase in FI would enhance disclosure pressure on Japanese corporations (Sakawa et al.,2014).

issue annual MF on annual earnings announcement dates. Thus, MF produce information
useful to analysts, especially at the start of the fiscal year, when alternative corporate
information disclosure is generally not released (Ota, 2010).
Japanese MNEs are suitable for investigation regardless of whether
internationalization affects disclosure quality in stakeholder-oriented CG for threereasons. First, investigating managerial disclosure quality under the effectively mandated
MF systems in Japan is desirable (Kato et al., 2009). As previously mentioned, in the U.S.,
producing evidence to examine the credibility of MF is generally difficult. 2 thus, theJapanese context is suitable for investigating the overall disclosure quality of MNEs’ MF.
Second, progress in the internationalization of Japanese MNEs has been remarkable. In
2018, Japan had its largest foreign direct investment (FDI) outflow, as measured by thediversity of its host countries (JETRO, 2018). Thus, the Japanese MNEs setting ispreferable for investigating how internationalization affects corporate disclosure quality.
Third, Japanese stakeholder-oriented CG is distinct from Anglo-American shareholderoriented systems (Aguilera & Jackson, 2003). FI has also increased in Japanese
corporations (Desender et al., 2016). The increased presence of FI with a shareholderoriented logic emphasizes disclosure quality (Desender et al., 2016; Sakawa et al., 2021).
However, little is known about how the disclosure quality of Japanese MNEs isaffected by the progress of internationalization and the pressure exerted by FI’s
shareholder-oriented logic. To address this research gap, we aimed to clarify how thedisclosure quality of MF is affected by the internationalization of MNEs in the face ofcomplexities and uncertainties. Thus, we examined whether the disclosure quality of MF
was low in highly internationalized Japanese corporations under complex and uncertain
conditions. To measure the degree of internationalization of MNEs, we used the level ofdiversification of internationalization (Lu & Beamish, 2004).
Using data from 2007 to 2018 from a sample of Japanese corporations, we
assessed the relationship between the degree of internationalization and the disclosure
quality of MF under an effectively implemented mandated MF system. First, we foundthat the disclosure quality of MF was lower in highly internationalized MNEs. Second,
the negative relationship between the disclosure quality of MF and internationalization
was positively moderated by FI. Due to the stronger disclosure pressure on firms withlarger FI (Sakawa et al., 2014), the disclosure quality of MF is positively moderated bygreater FI in highly internationalized firms.
This study, which focuses on the intersection of international accounting and ICG
research, contributes to the current body of literature in several ways. First, we observed
how the complexity of internationalization affects the disclosure quality of mandatory
MF in Japan (Aguilera et al., 2017; Kato et al., 2009). The complexity ofinternationalization increases the risks and costs, which can negatively impact a firm’s
future returns (Geringer et al., 2000; Ruigrok & Wagner, 2003). Previous research has
revealed that firms can enjoy the benefits of internationalization in the initial stages(Vrontis & Christofi, 2021), whereas the overexpansion of internationalization generates
greater costs (Gomes & Ramaswamy, 1999; Lu & Beamish, 2004). Thus, our study aimed
to understand whether the complexity of internationalization benefits or harms
managerial disclosure quality in Japanese MNEs. Second, this study contributes to the2

In the United States, the MF is endogenously determined, as managers decide to disclose
forecasts with the different managerial incentives under the voluntary MF systems (Ajinkya etal., 2005; Karamanou & Vafeas, 2005; Verrecchia, 2001).

ICG research, which focuses on the role of FI in heterogeneous ownership structures(Aguilera et al., 2018; Desender et al., 2016). Our study attempted to reveal how foreignand domestic shareholders respond to management disclosure quality in Japanese MNEs
with divergent interests. Third, we add to the literature on ICG (Aguilera et al., 2019) byshedding light on a novel aspect of MNEs’ governance costs; that is, the accounting gaps
in the internationalization process and determining the situations under which such costs
would be reduced (i.e., when MNEs have greater FI).

2. Institutional Backgrounds and Hypotheses Development
2.1. Institutional backgrounds
The interests of stakeholders, such as bank–client and inter-firm relationships, are crucial
in stakeholder-oriented CG, which differs from shareholder-oriented CG (Yoshimori,1995). In Japan, bank–client relationships have been maintained for extended periods(Desender et al., 2016). Such relationships function as effective monitoring mechanisms
to mitigate agency problems (Kang & Shivdasani, 1995; Morck et al., 2000; Sakawa &Watanabel, 2021b, 2022). Additionally, firms with close relationships with banks tend toenhance the quality of their earnings (Sakawa & Watanabel, 2021a).
Since the financial deregulation in the 1990s in Japan, FI have increased (Aguilera
et al., 2017). FI’s ownership of Japanese corporations was only approximately 5% in theearly 1990s (Desender et al., 2016). This figure increased to approximately 15% post2010.3 FI exert pressure on listed firms to disclose (Sakawa et al., 2014). Additionally,
the greater presence of FI is linked with higher corporate risk-taking to achieve corporate
innovation (Sakawa, Watanabel, Duppati, and Faff, 2021)4.
Under globalization, Japanese firms have expanded over the past two decades(Sakawa et al., 2021). In 2018, Japan became the world’s largest FDI outflow economy(JETRO 2018). Agency theory predicts that internationalized MNEs demand better
disclosures to realize effective CG (Aguilera et al., 2019). Thus, internationalized
Japanese MNEs are expected to achieve better quality MF because FI demand better
disclosure.
Japanese mandatory-effective MF disclosures are based on lower legal costs than
voluntary U.S. MF disclosures (Buchanan et al., 2012; Kato et al., 2009). We discuss thecosts and benefits of issuing management disclosure in the Japanese MNE setting.
Specifically, we separately consider the costs (i.e., proprietary and litigation costs) andbenefits (i.e., lower cost of external financing) of issuing mandatory forecasts forJapanese MNEs. First, regarding proprietary costs, the disclosure of earnings information
by Japanese MF does not include proprietary information, such as custom identification,
which affects the choice of management disclosure in the U.S. (Ellis et al., 2012). Thus,
proprietary costs do not affect the choice of management disclosure among Japanese
MNEs. Second, regarding litigation costs, managers in Japanese MNEs can benefit frommitigating ligation risks from FI by issuing and revising MF using the lower legal andlitigation costs in Japan (Kato et al., 2009). Third, regarding the benefits of MF disclosure,Japanese MNEs can enjoy lower costs of external financing from FI. FI favor stakes in
3
4

The stakes increase from 15 % in 2010 to approximately 20% in 2017.

Aman et al. (2021) describe the corporate environment and internal monitoring systems inJapan.

firms with lower information asymmetry (Sakawa et al., 2014). Thus, we conjecture thatthe benefits of issuing reliable MF exceed the costs incurred by Japanese MNEs.
The Japanese disclosure system enables the analysis of unbiased MF observations.
This saves us from sample selection bias, unlike the U.S. system of voluntary disclosure(Ishida et al., 2021). This system enables Japanese managers to manage their initial MF
strategically and subsequently revise their MF (Conroy et al., 2000; Edelman, 1992).
Under effectively mandated MF, managers’ initial MF for a fiscal year are systemicallyupward biased (Kato et al., 2009). In firms with greater FI, managers with shareholderoriented logic have been seen to make highly optimistic initial forecasts to attract FI(Aguilera et al., 2017) because FI place more importance on shorter firm value than longer
firm value (Geng et al., 2016).
The Japanese mandatory-effective MF system is useful for investigating the effectof managerial optimism on subsequent revisions of MF (Aguilera et al., 2017). The
disclosure quality of MF has been enhanced by voluntary revisions by Japanese
corporations (Nagata & Nguyen, 2017). Thus, the credibility of MF is reflected in themagnitude of earnings adjustments in revised MF.
2.2. Theoretical frameworks and hypotheses development
We argue that complexity is essential to understanding the influence of international
expansion on managerial reporting practices in Japanese MNEs. The institutional theory
implies that complexity influences firms’ strategies, decisions, and performance(Greenwood et al., 2011; Palmer & Wiseman, 1999). From the perspective ofinternational business research, MNEs are affected by the institutional complexity ofconflicting tensions arising from multiple incompatible institutions (Kostova & Zaheer,
1999; Kostova et al., 2008). As the number of institutional environments (number ofcountries) increases, institutional complexity increases for internationalized MNEs
(Arregle et al., 2016). Thus, institutional complexity is crucial in determining managerial
disclosure quality in the Japanese MNE setting.
This study analyzes the disclosure quality of mandatory managerial reporting instakeholder-oriented CG from an institutional complexity perspective (Arregle et al.,2016). Agency theory predicts that outside shareholders urge better disclosure byinternationalized MNEs, which can be achieved under effective CG by MNEs (Aguilera
et al., 2019). FI place more weight on shareholder-oriented logic in stakeholder-oriented
CG (Aguilera et al., 2017). Internal monitoring mechanisms and bank–firm relationships
help improve the effectiveness of CG by monitoring outside shareholders and managerial
incentive systems in Japanese corporations (Aguilera et al., 2008).
The concept of institutional complexity explains how formal and cultural
institutions in countries in which Japanese MNEs expand their business affect theirinternationalization decisions made by those MNEs (Arregle et al., 2016). ICG research
has shown that MNEs also face foreign pressure from shareholder-oriented logic(Aguilera et al., 2019). In other words, managers of internationalized MNEs facedifficulties achieving better disclosure because of their higher degree of uncertainty andcomplexity. Given the uncertainty and complexity of internationalization, there may be
two alternative views on the relationship between internationalization and disclosure
quality in MNEs. First, internationalization enhances the disclosure quality of MNEs. The
frequency of MF tends to be higher in U.S. cross-listed MNEs (Shi et al., 2012).
Alternatively, disclosure quality may be lower in internationalized MNEs. In the U.S.,
better disclosure, measured as analyst forecasts in internationalized MNEs, is lowerbecause MNEs face a higher degree of complexity due to geographical diversification(Duru & Reeb, 2002). In addition, analysts assess FI’s internationalization (Luo & Zheng,2018).
In an economy where MF are effectively mandated, managers face difficulty
releasing accurate MF under complexity and uncertainties (due to internationalization).
During internationalization, Japanese MNEs face accounting gaps between their homeand host subsidiaries (Sakawa et al., 2021). The complexity of accounting gaps isincreased by a higher degree of internationalization. The complexity of consolidated
financial reporting reduces management disclosure quality. We predicted that managersof highly internationalized MNEs would issue less accurate forecasts. Therefore, we
propose:Hypothesis 1: Disclosure quality of mandatory MF is lower in highlyinternationalized MNEs.
Several studies have analyzed why and how managerial disclosure quality is
characterized by ICG logic. From the perspective of ICG research, FI affect managerial
reporting behavior (Aguilera et al., 2017). FI demand compatibility with financial
reporting in MNEs (Sakawa et al., 2021). With the rise of financial globalization,
Japanese corporations have been coping with pressures from FI within the boundaries ofexisting governance practices (Desender et al., 2016).
In stakeholder-oriented CG, the managerial incentive is provided by firms withlarger stakes of FI (Geng et al., 2016; Sakawa et al., 2012). Thus, managers in Japanesefirms cope with pressure from FI using shareholder-oriented logic by enhancing
disclosure quality. For example, Japanese corporations are increasingly adoptinginternational accounting standards because of the increased presence of FI (Sakawa et al.,2021). Information asymmetry decreases in firms with larger FI stakes because of thehigh disclosure pressure they exert (Sakawa et al., 2014). Therefore, we propose that FI
improve the disclosure quality of MNEs:
Hypothesis 2: FI are positively associated with mandatory disclosures in highlyinternationalized MNEs.

3. Data and Methodology
3.1. Sample
We include all firms listed on the Tokyo Stock Exchange (TSE) from 2007 to 2018.
Financial firms were excluded because their accounting systems are distinct from thoseof non-financial firms. We obtained financial, management, and corporate ownership datafrom Data Solution and Astra Manager. We collected data on Japanese overseas
investments from Toyo Keizai Inc. (David et al., 2010; Goerzen & Beamish, 2005).5 We
followed selection criteria established in a previous study (Arregle et al., 2016). The
resulting sample comprised 13,280 MNE-year observations and 7,330 non-MNE-year
observations. The data were classified based on Japanese industry codes.
3.2. Methodology

5

Toyo Keizai data is the most reliable data for research on Japanese MNEs (Hong et al., 2019).

Our hypotheses were tested using the following equation to estimate the relationshipbetween MF quality and internationalization:
𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝑖,𝑡= 𝛽1𝐼𝑛𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑜𝑛𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛𝑖,𝑡 +𝛽2𝐼𝑛𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑜𝑛𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛𝑖,𝑡 ∗ 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑖,𝑡+ 𝛽3 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑖,𝑡 + ∑ 𝛽𝑗 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑖,𝑡−1 + 𝜀𝑖.𝑡 ・・・(1)𝑗

In Equation (1), the dependent variable is MF i,t. The control variables are represented
by Controls I,t. To mitigate endogeneity concerns, we adopted independent variables tomeasure at the start of the fiscal year (Aguilera et al., 2017). We also controlled forindustry and year effects by adding industry and year dummy variables. The error term isrepresented by εi,t. Subscripts i and t refer to the firm and year, respectively.
3.2.1. Dependent variables
We measured the disclosure quality of MF using both initial MF and their revisions.
Under effectively mandated MF systems, initial MF reflect managerial optimism and aresubsequently revised (Aguilera et al., 2017). Thus, disclosure quality is enhanced whenmanagers issue more accurate and optimistic forecasts. Additionally, disclosure quality
is enhanced by revising optimistic MF. We also focused on net income forecasts because,
for investors in Japan, a high net income forecast is more important than sales or operating
income forecasts (Kato et al., 2009).
We defined the quality of initial MF using two variables: initial MF optimism,
measured as initial earnings errors (Forecast Error) (Aguilera et al., 2017; Kato et al.,2009). We defined Forecast Error as:( 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝐹 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑡 )−(𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑡−1 ).
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑎𝑡 𝑦𝑒𝑎𝑟
𝑡−1

Forecast Error tends to have larger negative values when MF fall undermanagerial optimism. Second, we measured Forecast Accuracy as the absolute value of
Forecast Error (Ajinkya et al., 2005; Kato et al., 2009). As Forecast Accuracy decreases,
MF become more accurate.
We also measured the disclosure quality of MF revisions using the magnitude of
the forecast revisions (Aguilera et al., 2017; Ishida et al., 2021). The corporation’s
disclosure quality was measured by the propensity of management to provide revised MF.
Under the effective Japanese mandatory MF system, MF tend to be optimistically biased
owing to lower legal and litigation costs (Kato et al., 2009). Given the tendency to make
optimistic initial MF, voluntary revision of MF is an important measure of better
disclosure (Nagata & Nguyen, 2017). Magnitude (magnitude of forecast revisions) isdefined as:(𝐿𝑎𝑠𝑡 𝑀𝐹 𝑅𝑒𝑣𝑖𝑠𝑖𝑜𝑛𝑠 𝑡 )−(𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝑀𝐹 𝑡 ).
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑎𝑡 𝑦𝑒𝑎𝑟 𝑡−1

3.2.2. Key independent variables
We adopted the internationalization diversification (Internationalization) proxy to
calculate the degree of internationalization by combining the number of countries andsubsidiaries (Lu & Beamish, 2004; Sakawa et al., 2021). Ownership variables also
influence the quality of management disclosures in internationalized firms. We measured

foreign ownership (FO) as the ratio of foreign shares to total outstanding shares. We
measured bank ownership (Bank) as the ratio of bank shares to total outstanding shares.
We controlled for two CG variables: audit firm quality and board independence.
First, we adopted a dummy variable, the big four auditors (Big 4: EY, Deloitte, KPMG,
or PwC), to control the quality of auditors (Aguilera et al., 2017; Sakawa & Watanabel,
2021a, 2022). We expected that high-quality audit firms to mitigate managerial incentives
to make more optimistic forecasts (Aguilera et al., 2017). Second, board independence
was measured as the proportion of outside directors to the total number of directors. Post2000, board independence (Board Independence) has gradually begun to function in
stakeholder-oriented CG (Desender et al., 2016). Thus, we expected the effective
monitoring of firms through a stronger assertion of board independence to be associatedwith less optimistic forecasts.
Finally, we adopted firm characteristics, such as size, leverage, profitability, sales
growth, prior optimism, and asset turnover (Aguilera et al., 2017; Kato et al., 2009). We
adopted total assets as firm size (Size). Larger firms face greater external discipline and/or
reputational costs; thus, they would display less managerial optimism than smaller firms.
Firm leverage (Leverage) is the ratio of total liabilities to total assets. Firms with higher
leverage levels are under more pressure to issue optimistic forecasts (Barton & Simko,
2002). To control for MF optimism in firms with low performance, we controlled for past
firm performance using return on assets (ROA) and sales (Sale Growth) (Aguilera et al.,2017). Prior optimisms was controlled for by a dummy variable that was 1 when thefirm’s net earnings were below its initial forecast; otherwise, zero. If managerial optimism
persists in year t, this dummy was positively associated with initial earnings optimism(Kato et al., 2009). Low operating turnover (Asset Turnover) equaled one when the ratioof sales dividends to net operating assets was below the median for the respective industry
year assessed using TSE industry codes and zero otherwise (Aguilera et al., 2017).

4. Results
4.1. Descriptive statistics
Descriptive statistics are presented in Table 1. The descriptive statistics align with thoseof previous studies (Aguilera et al., 2017; Kato et al., 2009). The average forecast error
is negative for the initial disclosure of MF. The average accuracy of MF is 2.145, and theaverage Magnitude is 1.851, indicating that disclosure quality is enhanced by correcting
initial managerial optimism (Ishida et al., 2021).
Next, we present the descriptive statistics of the independent variables.
Internationalization is 0.036 on average, aligning with previous findings (Lu & Beamish,2004). FO are about 10.6% on average, consistent with previous findings that the presenceof foreign shareholders in more than half of firms is less than 10% (Aguilera et al., 2017).
For the control variables, the averages of Size and Leverage are approximately 10.85 and49.6%, respectively, consistent with Sakawa et al.’s (2021) results. The average ROA andsales growth are approximately 2.3% and 3.1%, respectively, consistent with Aguilera etal.’s (2017) results. Prior Optimism is 0.510 (on a scale of 0 to 1), indicating the presenceof prior optimism in initial MF, aligning with Kato et al. (2009). As for CG variables,
approximately 72% of firms are audited by Big Four auditors. In addition, board
independence is approximately 13.5%, lower than that in Anglo-American countries.
Asset Turnover is approximately 50%, on average.

Table 2 lists the correlation matrices. Forecast Accuracy is negatively correlatedwith Magnitude. This implies that, in line with previous findings, MF revisions mitigate
managerial forecast accuracy (Kato et al., 2009). In addition, Forecast Accuracy ispositively related to Size and ROA and negatively related to leverage and the Big 4,
consistent with Aguilera et al. (2017).

4.2. Estimated results
Table 3 shows the estimated results of the relationship between the disclosure quality of
MF and internationalization, and the interaction terms of internationalization and FO. The
dependent variables are the disclosure quality of MF and managerial optimism proxyvariables (Aguilera et al., 2017; Ishida et al., 2021). Table 3 introduces the basic models
with Forecast Error, Forecast Accuracy, and Magnitude in Models (1), (4), and (7).
Subsequently, we introduce the estimated results by adding Internationalization to
Models (2), (5), and (8) to examine whether Hypothesis 1 is supported. We also add theinteraction terms of Internationalization and FO to Models (3), (6), and (9) to investigate
the relevance of Hypothesis 2.

Table 1. Descriptive Statistics
Variable
Forecast Error
Forecast Accuracy
Magnitude
Internationalization
FO
Bank
Size
Leverage
ROA
Sale growth
Prior Optimism
Big 4
Board Independence
Asset Turnover

Number
20610
20610
20610
20610
20610
20610
20610
20610
20610
20610
20610
20610
20610
20610

Mean
-0.799
2.145
1.851
0.036
10.59919.57110.851
0.496
0.023
0.031
0.510
0.718
0.135
0.497

Standard
Deviation
3.788
3.557
3.324
0.056
11.53913.088
1.618
0.198
0.052
0.143
0.500
0.450
0.147
0.500

Median-0.017
0.946
0.725
0.017
6.310
17.52510.678
0.500
0.026
0.025
1.000
1.000
0.111
0.000

Table 2. Correlation Matrix
(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

1. Forecast Error
2. Forecast
Accuracy-0.70 *

3. Magnitude-0.69 *

4. International

0.06 * -0.07 * -0.06 *5. FO

0.04 * -0.06 * -0.06 *0.51 *

6. Bank

0.12 * -0.19 * -0.17 *0.44 *

0.43 *

7. Size

0.15 * -0.24 * -0.22 *0.60 *

0.63 *

0.64 *

8. Leverage-0.02 * -0.02 * -0.01

0.03 * -0.16 *0.05 *

0.14 *

9. ROA

0.26 * -0.31 * -0.31 *0.07 *

0.20 *

0.13 *

0.14 * -0.24 *10. Sale Growth

0.29 * -0.11 * -0.13 *0.01

0.05 *

0.00

0.00

11. Prior
Optimism-0.20 *

12. Big 40.07 * -0.10 * -0.09 *0.14 *

0.16 *

0.14 *

0.24 * -0.01 *0.09 * -0.02 * -0.02 *0.00

0.04 *

0.03 *

0.10 *

0.21 * -0.06 *0.08 * -0.05 *0.03 *

-0.01

0.00

0.01

-0.06 *

0.07 *

0.04 * -0.25 * -0.04 *13. Board
Independence
14. Asset
Turnover* p < .05

0.95 *

0.16 *

0.16 * -0.05 * -0.09 * -0.09 * -0.11 *0.03 *-0.03 *

0.10 *

0.03 * -0.39 * -0.14 *0.02 * -0.03 *0.06 *

0.07 *

0.02 * -0.02 * -0.01

Table 3. OLS Estimated Results
(1)

(2)

(3)

(4)

Forecast Error
Internationalization

(5)

(6)

(7)

Forecast Accuracy

(8)

(9)

Magnitude-2.531 **-4.020 **4.398 **

5.916 **

3.853 **

5.149 **(-4.26)(-5.04)(6.30)(6.26)(6.10)(6.14)

Internationalization

0.046 **

-0.047 *-0.040 ** Foreign(2.79)(-2.27)(-2.25)

Foreign-0.037 **-0.039 **0.048 **

0.051 **

0.039 **

0.040 **(-8.12)(-8.07)(9.64)(9.46)(8.62)(8.51)

0.008 **

0.008 **

-0.014 **-0.015 **-0.012 **-0.013 **(2.96)(3.16)(-4.52)(-4.70)(-4.31)(-4.47)

0.197 **

0.388 **

0.392 **

-0.383 **-0.640 **-0.644 **-0.327 **-0.535 **-0.538 **(9.14)(9.67)(9.72)(-14.44)(-13.47)(-13.52)(-13.59)(-12.35)(-12.41)0.628 **

0.120

0.100

-0.925 **-0.244-0.223-0.718 **-0.172-0.154(2.62)(0.50)(0.41)(-3.84)(-1.01)(-0.92)(-3.42)(-0.79)(-0.71)

15.630 **15.800 **15.790 **-19.810 **-19.970 **-19.960 **-18.130 **-18.240 **-18.230 **(10.55)(10.77)(10.76)(-13.56)(-14.03)(-14.02)(-14.26)(-14.63)(-14.61)6.986 **

7.106 **

7.117 **

-1.606 **-1.773 **-1.784 **-1.944 **-2.080 **-2.089 **(20.99)(21.38)(21.38)(-5.07)(-5.67)(-5.70)(-6.63)(-7.16)(-7.18)-0.573 **-0.554 **-0.551 **

0.033

0.005

0.002

0.043

0.021

0.019

(-10.41)(-10.07)(-10.01)(0.62)(0.10)(0.05)(0.88)(0.43)(0.38)Bank
Size
Leverage
ROA
Sale Growth
Prior Optimism
Big 4

0.265 **

0.250 **

0.252 **

-0.314 **-0.292 **-0.294 **-0.234 **-0.216 **-0.218 **(3.67)(3.57)(3.61)(-3.77)(-3.69)(-3.72)(-3.16)(-3.04)(-3.07)

Board-1.103 **-0.611 *-0.612 *1.910 **

1.214 **

1.216 **

1.759 **

1.192 **

1.193 **

Independence(-4.22)(-2.51)(-2.52)(6.00)(4.13)(4.14)(6.13)(4.43)(4.44)

Asset-0.044-0.083-0.093-0.080-0.017-0.006-0.040

0.014

0.023

Turnover(-0.78)(-1.47)(-1.63)(-1.29)(-0.28)(-0.11)(-0.72)(0.26)(0.42)

Year

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Industry
Number

Yes
20610

Yes
20610

Yes
20610

Yes
20610

Yes
20610

Yes
20610

Yes
20610

Yes
20610

Yes
20610

Adjusted R2

0.232

0.240

0.240

0.206

0.223

0.223

0.207

0.220

0.220

F Value

61.17 **
58.45 **
57.18 **
40.31 **
38.99 **
38.09 **
45.67 **
43.55 **
42.57 **
Note. Models (1)–(9) are estimated using liner. All independent variables are lagged by one term. Standard errors are clustered by firm. The
t-values are shown in parentheses. See Appendix for definitions and measurements of the variables.
*p < .05, **p < .01

Model (2) shows that Internationalization is significantly and negatively related to
Forecast Error. In addition, FO is significantly negative for Forecast Error in Model (2).
Regarding the accuracy of initial MF, Internationalization is significantly and positively
related to Forecast Accuracy in Model (5). This finding suggests that the disclosure qualityof initial managerial forecasts is lower in highly internationalized firms. Furthermore, inalignment with Aguilera et al.’s (2017) findings, greater FO would enhance managerial
opportunism. Regarding the disclosure quality of management revisions, we find that bothInternationalization and FO were significantly positively related to Magnitude in Model (8).
This implies that the disclosure quality of initial MF and earnings revised by the management
is lower in highly internationalized firms. These results offer consistent support for
Hypothesis 1. Moreover, we observe that managerial optimism of initial MF and MF
revisions increased with greater stakes of FO, aligning with a previous finding (Aguilera etal., 2017).
Next, to investigate the relevance of Hypothesis 2, we use the regression results inModels (3), (6), and (9). We find that the interaction terms of Internationalization and FO
are significantly positively related to Forecast Error in Model (3) and negatively related to
Forecast Accuracy in Model (6). This implies that managerial optimism in highlyinternationalized firms is moderated by the greater stakes of FO. In other words, thedisclosure quality of MF improves in MNEs with a higher degree of internationalization,
which results in greater disclosure pressure from FI. Finally, the interaction terms ofInternationalization and FO trade are negatively related to Magnitude in Model (9). The
implication is that the optimism of initial MF in highly internationalized firms is diminishedby the greater stakes of FI Overall, these results support Hypothesis 2. FO are positively
associated with better mandatory disclosure in highly internationalized MNEs; that is,internationalization negatively influences optimism in the MF of firms with higher FO. These
results imply that initial optimistic MF are subject to revision to a greater extent for firms
with more FI. This finding is consistent with the predictions of previous studies (Nagata &Nguyen, 2017).
The estimated results in all the models also show that the control variables are
significantly associated with the disclosure quality of MF. In Models (1), (2), and (3), theForecast Error is smaller for larger firms, which have higher Sale growth and ROA, lower
levels of Leverage, lack Prior Optimism, and are audited by BIG 4. Models (4), (5), and (6),which consider Forecast Accuracy and Magnitude, predict the opposite (less positive) results.
We find that Forecast Accuracy is more precise for larger firms that have higher Sale growthand ROA, a lower level of Leverage, and are audited by BIG4. Models (7), (8), and (9), which
consider Magnitude indicate that initial managerial optimism undergoes much more revisionin the cases of firms that have larger Size, higher Sale growth and ROA, a lower leverage
ratio, and are audited by BIG4. These results support the predictions of Aguilera et al. (2017).
Bank is positively and significantly related to Forecast Error in Models (2) and (3). We also
observe that Bank is significantly negatively related to Forecast Error in Models (5) and (6)and Magnitude in Models (8) and (9).
4.3. Additional analyses
We perform additional analyses to mitigate endogeneity concerns. Using a two-stage leastsquares (2SLS) regression, we adopt Industry adjusted internationalization, calculated by theaverage degree of internationalization (excluding the contribution of the focal firm) for eachindustrial sector-size pair, based on total assets as an instrument for Internationalization.6
We hypothesize that the degree of internationalization of other firms within the same sectorof a similar size may influence a focal firm’s degree of internationalization degree but isunlikely to affect its disclosure quality on MF. Thus, we conclude that the assumption of the
exclusion restrictions is satisfied.
We adopt stock membership in TOPIX 500 as an instrument for Internationalization.
TOPIX 500 equals one if a firm is included in the TOPIX 500 in a given year and zerootherwise. The assumption of an exclusion restriction is satisfied because the firm’s
management disclosure quality does not depend on whether the firm is included in the stock
membership in TOPIX 500. This Industry adjusted Internationalization (IV) is relevant
because firms selected as TOPIX 500 tend to realize higher internationalization. Highlyinternationalized firms tend to have a larger market capitalization (Sakawa et al., 2021), andfirms selected as the stock members in the TOPIX 500 account for more than 85% of themarket capitalization in the 1st Section of the TSE (Chizema & Shinozawa, 2012; Sakawa &Watanabel, 2020). This suggests that TOPIX 500 selects highly internationalized firms,
which face complexity and uncertainties that would reduce the quality of management
disclosure.
In Table 4, the first-stage regression results, where the dependent variable isInternationalization, are shown in Models (1) and (2), and the second-stage regression results
are shown in Models (3), (4), (5), (6), (7), and (8). The first stage assesses whether the IV is
associated with Internationalization. To ensure the validity of the instrumental variable(Industry adjusted internationalization), we check the F-tests for the significance of the
instruments in the 1st stage regression and show that the F-tests are rejected at the 1% levelin Models (1) and (2). This indicates that this IV is relevant7.
The coefficients of Internationalization show significantly negative signs in Models (3)and (4). The coefficients of Internationalization are positive for Forecast Accuracy in Models(5) and (6) and Magnitude in Models (7) and (8). Our findings provide consistent support for
Hypothesis 1. This implies that the initial managerial disclosure quality is lower in highlyinternationalized firms.
The interaction terms Internationalization and FO are positively and significantly
related to Forecast Error in Model (4). In addition, the interaction terms are significantly andnegatively related to Forecast Accuracy in Model (6) and the Magnitude in Model (8). Ourfindings support Hypothesis 2, and we can infer that the lower disclosure quality of MF witha higher degree of internationalization is increased by the greater stakes of FO. Thus, we
confirm the robustness of our results by considering endogeneity.

6

Following Desender et al., (2016), we use 33 industrial sectors by TSE industry classification andfour categories of firm size using the quartile cut-off points first Quantile (Q1) – second Quantile(Q2) – third Quantile (Q3) based on total assets.
7

We also check the Weak identification test (Cragg-Donald Wald test) of IV. In Table 4, we showthat the values in Columns (3)–(8) exceed 10% of the maximal IV size (Stock and Yogo). Thus, we
confirm that our IV is not weak.

Table 4. Results of 2SLS
(1)

(2)
1st stage
Internationalization(3)

Internationalization
Internationalization
* FO
FO
Bank
Size
Leverage
ROA
Sale Growth
Prior Optimism
Big 4
Board
Independence
Asset
Turnover0.001(5.17)
0.000(1.36)
0.012(9.85)
0.000(0.02)-0.040(-4.13)0.005(2.16)
0.017(2.63)
0.001(1.58)-0.002(-1.16)-0.011(-6.65)

**

**

**
*
**

**

0.017
(10.90)-0.001(-5.30)0.000(4.08)
0.007(9.53)-0.007(-2.67)-0.022(-3.76)0.006(4.38)
0.001(3.35)
0.000(0.06)
0.007(1.70)-0.008(-7.46)

**
**
**
**
**
**
**
**

+
**

(4)

Forecast Error-9.662 **-24.700(-2.80)(-2.31)0.407(2.06)-0.031 **-0.048(-5.82)(-6.53)0.009 **
0.014
(3.20)(3.40)
0.501 **
0.565
(6.63)(5.35)
0.115-0.063(0.48)(-0.25)15.510 **15.350(10.85)(10.72)
7.152 **
7.259
(21.51)(21.35)-0.546 **-0.520(-9.80)(-8.67)0.235 **
0.251
(3.32)(3.46)-0.493 +-0.473(-1.93)(-1.81)-0.158 *-0.266(-2.44)(-2.61)

(5)

*
*
**
**
**

**
**
**
**
+
**

(6)
2nd stage
Forecast Accuracy
25.210 **65.140(5.10)(3.27)-1.082(-2.71)0.031 **
0.076
(4.78)(5.64)-0.018 **-0.032(-4.41)(-4.10)-0.969 **-1.140(-9.69)(-6.65)-0.2300.243(-0.89)(0.75)-19.120 **-18.680(-13.78)(-12.91)-1.905 **-2.191(-6.05)(-6.43)-0.017-0.085(-0.30)(-1.25)-0.247 **-0.291(-2.87)(-2.93)0.870 *
0.818
(2.53)(2.08)
0.201 *
0.488
(2.38)(2.74)

(7)

**
**
**
**
**

**
**

**
*
**

(8)

Magnitude
20.660 **53.020(4.74)(3.16)-0.876(-2.63)0.024 **
0.061
(4.32)(5.41)-0.015 **-0.026(-4.32)(-4.05)-0.801 **-0.939(-8.94)(-6.37)-0.1610.223(-0.71)(0.80)-17.550 **-17.190(-14.47)(-13.61)-2.187 **-2.418(-7.50)(-7.76)0.003-0.052(0.07)(-0.85)-0.180 *-0.215(-2.36)(-2.51)0.914 **
0.871
(2.98)(2.53)
0.190 *
0.422
(2.54)(2.80)

**
**
**
**
**

**
**

*
*
**

Industry-adjusted
Internationalization

0.030 **

0.011 **

(7.44)(3.60)Year
Yes
Yes
Industry
Yes
Yes
Number
20610
20610
Adjusted R2
0.516
0.783
F Value
31.77 **
117.2 **
Under-identification (Anderson LM test)

Yes
Yes
20610
0.234
57.38 **
56.00 **

Yes
Yes
20610
0.219
56.14 **
12.78 **

Yes
Yes
20610
0.169
33.75 **
56.00 **

Yes
Yes
20610
0.033829.56 **
12.78 **

Yes
Yes
20610
0.180
38.81 **
56.00 **

Yes
Yes
20610
0.078134.69 **
12.78 **

Note. Models (1) and (2) show the results for stage (IV). Models (3) to (8) show the results for stage (IV). Standard errors are
clustered by firms. t-values are shown in parentheses. See the Appendix for definitions and measurements of the variables.
+ p < .10, *p < .05, **p < .01

5. Discussion
This study utilizes a unique institutional background to investigate the effect of international
diversification on managerial disclosure quality in multinational enterprises (MNEs) in Japan,
using a unique institutional background. We find that the disclosure quality of MF tends tobe lower in highly internationalized MNEs, which is attributed to the complexity anduncertainties they face. These findings are consistent with those of Duru and Reeb (2002).
Additionally, MNEs with greater FI achieve better disclosure, consistent with previous
findings that assert that greater FI stakes increase the disclosure quality of MF (Aguilera etal., 2017). With their shareholder-oriented logic, we posit that FI pressure managers toenhance the quality of management disclosures in stakeholder-oriented CG. Our findings are
consistent with those of previous studies of Indian MNEs. Chen et al. (2015) find that FI
controls effectively increase the disclosure quality of Indian MNEs.
This study makes several theoretical contributions to the literature. First, we examine
how internationalization affects managerial disclosure quality under Japan’s mandatory MF
system in Japan (Aguilera et al., 2017; Kato et al., 2009). Due to the complexity of theincreasing geographical diversity of MNEs' investments abroad, the disclosure quality ofanalysts’ forecasts decreases (Duru & Reeb, 2002). During the internationalization process,most Japanese MNEs face accounting gaps between their home and host countries (Sakawa
et al., 2021). In other words, Japanese MNEs face complex internationalization, which resultsin accounting gaps. A higher degree of internationalization increases the accounting gaps
between the home and host countries, and the resultant complexity of consolidated financial
reporting lowers management disclosure quality.
Second, this study examines how managers are differently pressured by shareholderoriented FI (Aguilera et al., 2017). In the internationalization process, domestic corporations
are required to attract FI who are accustomed to using different national governance logic(Aguilera et al., 2018). FI play an effective monitoring role in stakeholder-oriented CG(Aguilera et al., 2017). They emphasize the compatibility of financial reporting ininternationalized Japanese MNEs (Sakawa et al., 2021). Hence, managers of highlyinternationalized MNEs with high FI enhance their corporations’ disclosure quality.
Third, this study contributes to ICG research. From the ICG perspective, the effect of
disclosure requirements on MNEs’ governance costs is a valuable research topic (Aguilera
et al., 2019). When the headquarters of an MNE faces challenges when evaluating theperformance of foreign subsidiaries, monitoring costs increase thereby becoming a burden
for the MNE (Tomassen & Benito, 2009). The finding that managerial disclosure quality islower in complex MNEs indicates that MNEs’ governance costs are incurred by complexity
due to internationalization.
This study has implications for stakeholder-oriented CG based on ICG research(Aguilera et al., 2019). Our findings imply that FI pressure MNE managers to make better
disclosures because of their shareholder-oriented logic of FI (Aguilera et al., 2017). Thus,
pressure from FI helps enhance the disclosure quality of MNEs in stakeholder-oriented CG.
Our study has several limitations. First, we could not determine how theinternationalization affects other aspects of financial reporting, such as accounting
conservatism and earnings management. Second, we could not analyze how board members’expertise or monitoring roles affect managerial disclosure quality in MNEs. After the TSE
reforms, we urge the appointment of independent board members with special expertise.
Furthermore, FI are likely to appoint directors to large corporations (Schmid & Roedder,2021). Given this, these findings provide promising avenues for future research.

6. Conclusion
We analyzed the relationship between internationalization and the disclosure quality of
mandatory MF in Japanese MNEs from 2007 to 2018. Under the unique setting of mandatoryeffective MF systems in Japan, managers must address the benefits and costs of issuing MF.
Given the lower legal and litigation costs in Japanese corporations (Kato et al., 2009),
managers of Japanese MNEs can benefit from mitigating ligation risks from FI by issuing
and revising MF at lower costs. In addition, managers can benefit from the lower costs ofexternal financing from FI by issuing and revising MF. This is because FI favor investing infirms with higher disclosure quality. Considering the benefits and costs for managers ofJapanese MNEs, we assume that managers have an incentive to enhance disclosure quality
by issuing and revising MF under mandatory-effective MF systems.
Our results imply that internationalization lowers the disclosure quality of MF in
Japanese MNEs because of the complexities caused by expanding countries. Furthermore,
greater FI result in higher managerial disclosure quality, consistent with previous findings(Aguilera et al., 2017). From an institutional complexity perspective (Arregle et al., 2016),
institutional diversity makes management forecasting a complex task for managers ofJapanese MNEs. This results in reduced disclosure quality. In addition to compelling
managers of Japanese MNEs to make disclosures that suit their needs, FI encourage Japanese
MNEs to be financially compatible (Sakawa et al., 2021). Thus, FI contribute to theachievement of higher disclosure quality by internationalized Japanese MNEs.
Our study contributes to academic research and practice on ICG (Aguilera et al.,2019) and accounting research (Aguilera et al., 2021). First, we find that the complexities
caused by the internationalization of Japanese MNEs that follow a unique mandatory MF
system reduce managerial disclosure quality. In other words, Japanese MNEs that facecomplexities do not necessarily provide sufficient information to FI. Thus, our study sheds
light on the effect of institutional complexity on the MNEs’ disclosure quality (Arregle et al.,2016).
Second, we find that the pressure for higher disclosure quality from FI enhancesmanagerial disclosure quality. Thus, we provide evidence on the role of FI ininternationalized MNEs related to ICG research. From the perspective of accounting
practices in cross-national CG settings, better CG mechanisms are needed to complement
reporting quality in MNEs (Aguirela et al., 2021). In our view, pressure from FI is essential
to improve disclosure quality in complex MNEs under stakeholder-oriented CG.

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Appendix. Definitions of Variables
Variable
Forecast Error

Definition[Realized earnings for year t - Initial MF of year t earnings]/[Total assets at t - 1 year-end]

Forecast Accuracy

Absolute value of Forecast Error

Magnitude[Last MF – Initial MF] /[Total assets at t - 1 year-end]

Internationalization

The international diversification index (Lu & Beamish, 2004)

FI

Percentage ownership by FI for the year (t-1)

Bank

Percentage ownership by banks and financial institutions for theyear (t-1) (Sakawa et al., 2021)

Size

Log of total assets for the year (t-1)

Leverage

Percentage of debt: equity ratio for the year (t-1).

ROA

Net income over total assets

Sale Growth

The change in annual sales scaled by the previous year’s sales.

Prior Optimism

Big 4

Board Independence

A dummy variable that takes the value of 1 if the firm’s net
earnings were below its initial forecast, and zero otherwise.
A dummy variable that takes the value of 1 if the firm is audited
by one of the big four auditors, and zero otherwise.
The proportion of outside board members over the total board
size
A dummy variable that takes the value of 1 if the sales divided by

Asset Turnover

total assets is below the median of the corresponding Tokyo
Stock Exchange industry-year, and zero otherwise.

Industry-adjusted
Internationalization

The average level of internationalization degree (excluding thecontribution of the focal firm) for each industrial sector-size pair,based on total assets.