ISSN 2189-9592

Vol. 4, No.2, May 2020

Japan Federation of Management Related
Academies

Vice President
Fangqi Xu (Japan Creativity Society, Kindai University)
Editor-in-Chief
Yukio Takagaki (Japan Academy of Management, Surugadai University)
Editorial Board
Shintaro Abe (Japan Academy of Consumer Education, Josai International University)
Takabumi Hayashi (Japan Scholarly Association for Asian Management, Tokyo Fuji University)
Toshio Goto (Japan Academy of Business Administration, Japan University of Economics)
Hisamitsu Ihara (Japan Society for Applied Management, Tokyo Fuji University)
Jun Oeki (Lanchester Society, Chuo Gakuin University)
David T. Methé（Japan Creativity Society, Kwansei Gakuin University）

Masayasu Takahashi (Japan Academy of Business Administration, Meiji University)
Kim Hua Tan (SFHEA :Senior Fellow of Higher Education Academy, University of Nottingham)
Hideo Ueki (Knowledge Management Society of Japan, Tsukuba Gakuin University)
Masamichi Yoshioka (Global Academic Community, Tokyo University of Science)
Advisory Board
Kazuo Hiramatsu (Japan Accounting Association, Kwansei Gakuin University)
Nobutaka Kazama (Association for the Study of Industrial Management (Japan), Meiji
University)
Takayuki Nonoyama (Japan Association for Management Systems, Aichi Sangyo University)
Takao Nuki (Association for the Study of Industrial Management (Japan), Musashi University)
Koji Okubayashi (Japan Society of Human Resource Management, Osaka International
University)
Yoshihiro Tokuga (Japan Accounting Association, Kyoto University)
Akira Uchino (Japan Society of Business Mathematics, Senshu University)

ISSN 2189-9592

Vol.4, No.2, May 2020

Japan Federation of Management Related
Academies

Vol.4, No.2, May 2020
©2020 Japan Federation of Management Related Academies
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The original English language edition published by JFMRA.

Greetings to Our Readers on the Eighth Issue of
the Journal of Japanese Management
The Japan Federation of Management Related Academies (JFMRA) was established on
November 23, 2006. JFMRA is now through the affiliation of 55 academic societies in the fields
of management, accounting, commerce, and information management.
One of the main activities of JFMRA is to publish the Journal of Japanese Management,
the official publication of JFMRA.
Today, a few academic societies in Japan issue publishment solely in English; therefore,
by issuing this journal entirely in English, JFMRA aims to contribute to international
academic progress through advanced studies in wide-ranging research fields related to
management, management information, commerce, and accounting.
To date, social trends such as economic inequality, global environmental issues, the aging
and depopulating of societies, Sustainable Development Goals (SDGs), accelerated thedevelopment of new and emerging markets and innovations. Innovations, such as the Internetof things (IoT), artificial intelligence (AI), open innovation, and linkages that foster innovation,
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Accordingly, a wide-ranging interdisciplinary approach that calls for cooperation beyond theexisting academic framework of an individualistic society is needed. Therein lies thesignificance of JFMRA.
JFMRA has been focusing on the following themes: (1) the development of research andspread of knowledge in fields related to management, management information, accounting,and commerce; (2) research and contributions to society through education related to
management; (3) exchanges between various academies and researchers associated withmanagement; (4) cooperation with researchers overseas related to management; and (5)cooperation with the Science Council of Japan and other academic research communities.
JFMRA also organizes public lectures twice each year, an occasional meeting for the exchangeof ideas among members of the affiliations, as well as an annual symposium.
I rejoice at the release of the eighth issue (Vol.4, No.2) and would like to thank themembers of the Journal of Japanese Management (JJM) editorial board, especially Professor
Fangqi Xu, the Vice-President of JFMRA, and Professor Yukio Takagaki, the Chair of theeditorial board. I am confident that this issue will stimulate the readers intellectually. JFMRA,
with editorial board members, we sincerely wish this journal will become beyond the expectedlevels of many academic researchers at home and abroad.
Prof. Akira Uchino
President, Japan Federation of Management Related Academies
Professor, School of Commerce, Senshu University, Tokyo, Japani

Preface
It pleases me to announce the eighth electronic publication (Vol.4, No.2) of the Journalof Japanese Management (JJM), the official publication of the Japan Federation ofManagement Related Academies (JFMRA).
Though many academic associations exist in Japan, few appear to be active indisseminating Japanese knowledge abroad, particularly in the social sciences. It is incumbent
on us not only to continue conducting research on those Japanese managerial practices whichemphasize sound business management, but also to disseminate relevant strategies to theworld.
Needless to say, even though individual academic associations may be interested in
actively doing so, limited resources make it difficult to accomplish such a task. Fortunately,
many academic associations representing management, commerce, accounting, andmanagement information are participating in the Japan Federation of Management Related
Academics (JFMRA). One of the primary means of knowledge dissemination is the publicationof an academic journal in English. In today’s highly networked society (thanks to the Internet),
there is no doubt that electronic journals offer the most appropriate media, potentiallyaccessible to anyone at anytime, anywhere in the world.
There are three categories of JJM papers: (1) a paper of regular and/or equivalent
members (such as postgraduate members, etc.) of academic associations affiliated with
JFMRA, (2) English translation of best paper from academic associations affiliated with
JFMRA, (3) selected paper from the international conference hosted by or sponsored by
JFMRA. For further detail, please refer to our web site < http://www.jfmra.org/jjm/>.
On behalf of the editorial board, I would like to acknowledge our appreciation to thoseacademic associations that participated in this effort; additionally, we are grateful to themanuscript contributors and the reviewers for their cooperation. We continue to work hard forthe further development of JJM.
Dr. Yukio Takagaki
Editor-in-Chief, Journal of Japanese Management
Board member, Japan Federation of Management Related Academics
Professor, Faculty of Economics and Business, Surugadai University, Saitama, Japanii

Journal of Japanese Management Vol.4, No.2, May 2020

ISSN 2189-9592

Contents

Greetings to Our Readers on the Eighth Issue of

the Journal of JapaneseManagement

・・・・・ iAkira Uchino
Preface・・・・・ ii

Yukio Takagaki
A Study on Using Integrated Reports at Mega Banks:
Characteristics as Information Sharing Support Tools Within the Organization ・・・・・p.1
Mitsuru Akiyama
CEO Successor Characteristics and Issues of the Japanese Management System:
A Case of the Pharmaceutical Industry

・・・・・p.17

Miyano Horiuchi
Recommended paper by Japan Accounting Association
Appearance Process of Relationship between Public Financial Reports and Local Government
Bond Market: A Statistical Study Using U.S. States’ Data

Kentaro Haraguchiiii

・・・・・p.30

Journal of Japanese Management Vo.4, No.2, May 2020

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A Study on Using Integrated Reports at Mega Banks:
Characteristics as Information Sharing Support Tools Within the
Organization
Mitsuru Akiyama
Graduate School of Commerce, Waseda University, Japan
Japan Cost Accounting Association (JCAA)
E-mail: m_akiyama3@asagi.waseda.jp
Abstract
An integrated report gives stakeholders a bird’s-eye view of a company’s outlook and makes it
possible for information to be shared within the company. As such it can play a role in disseminating
the perspectives of top management to employees throughout the organization. In this paper, I focus
on the roles that an integrated report plays as an information-sharing tool in large organizations thathave been established through multiple mergers. I examine issues of in-house reconciliation throughanalysis of Japanese Mega banking organizations (“Mega Banks”). The information-sharing role ofintegrated reports is examined from four perspectives. These include having an explicit statement ofan easy to comprehend corporate philosophy, posting of the corporations history, posting of top
management’s vision/mission statement and statements introducing each division. These provide an
integrated internal narrative that provided guidance to all employees and a comprehensive andcohesive narrative to outside stakeholders of the Mega Banks. The integrated reports of the Mega
Banks are compared with their previous issuance of conventional disclosure magazines. It was foundthat only the integrated reports provide the cohesive narrative to both internal and external
stakeholders. Consequently I found out that the integrated reports of Mega Banks play the role ofinformation sharing support tool. Since integrated reports play the role of information sharing
support tool, it can be hypothesized that these reports can be utilized in large organizations where
in-house convergences have not progressed after the merging of large organizations into even larger
ones.
Key words:
Integrated report, Mega Bank, Information sharing support tool, Corporate philosophy, Disclosure
magazine(1) Introduction

shared narrative for members located anywhere

The first purpose of this paper is toin the organization. The second purpose of thisunderstand how the integrated report of an

paper is to determine how the shared narrative

organization, that is primarily used forof the integrate report can accelerate and unify

disclosure, can also be used to support thethe understanding of organizational members

information sharing function by generatingeven after the upheaval emanating from the1

Journal of Japanese Management Vo.4, No.2, May 2020

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merger of two or more large establishedincludes both financial and non-financialorganizations1.

information. "By presenting the information

As a company grows, the number of items

which was disclosed through different channels,

handled and the number of departments willin a bird’s eye view, stakeholders can read theincrease. For companies with remarkable

integrated report first, and then understand thegrowth, there are cases where the company's

overall picture of the company "(Saka, 2015, p.

business content is not sufficiently known to98). This means that stakeholders who seeksboth inside and outside of the company. This

information could omit the trouble of examining

condition is particularly noticeable at the large

a wide variety of disclosure sources whenenterprises reorganized by merging. The

learning about the company's outline.

merchandise, service contents and departments

Meanwhile, for the corporate as the sender ofof the merging partner company are often added

information, the issuance of the integrated

all at once, and it takes time to grasp the whole

report seems to aim for further "value creation"

picture after the merger. This holds true not(IIRC, 2013a; Ito (K), 2014, 2016; Koga, 2015;

only for the external but also for the internal

Kozuma, 2012; KPMG Japan Integrated

stakeholders. However, in our rapid changing

Reporting Advisory Group, 2017a). In addition,

modern society, we can’t afford to wait until

there is a discussion pointing out the effect ofmerging effects are demonstrated. The merging"market logic can be introduced to internal

company is required to steer a new structure

management managers by integrated report"

integrated with the organization at an early(Ito (K), 2014, p. 161). In other previous

stage. For this reason, large enterprises, which

researches, the integrated report also plays ahave been rapidly established through merging,role as not only disclosure for external but also aneed to share information, crucial for operating

strategy tool to share information of top

the

as

management’s ideas within the company to thetransmitting information to understand thelower-level employees (IIRC, 2013a, b; Ito (K),entire2014; KPMG Japan Integrated Reportingorganization

integrallyorganization,

both

as

well

internallyandexternally.

Advisory Group, 2017b; Ochi, 2016; Okamoto,

For public understanding of the entire

2015; Uchiyama, 2015).

organization, in addition to the securities report,

First of all, in this paper, I analyze thelisted companies issue annual reports, CSR

significance necessary for integrated reports notreports, environmental reports, and recently

only in the manufacturing industry but also in

integrated reports. The number of enterprises

banks. In recent years, there is an increasing

introducing the integrated report is graduallyneed to disclose information on how companies

increasing, and the awareness of the general

who are subject to receive investment and loanssociety is also increasing. The integrated reportwill affect global warming 2 . There are also

1 Basically, with reference to Akiyama (2018),

Society, and Governance), the Integrated
Report often covers the viewpoints necessary
for sustainable growth.

which written in Japanese, I analyzed thefunction of the integrated report as follows.
2 As ESG issues (acronym for Environment,2

Journal of Japanese Management Vo.4, No.2, May 2020

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indications that the structure which is unique to

may not want to share information with thefinancialfinancial

employees from other predecessor. Therefore,

bubbles is similar to drifting pollution, and theinternal harmonization does not proceed, and I

significance of issuing integrated reports at

explore the future role that the integrated reportbanks is gradually drawing attention in terms ofshould fulfill.

institutions

that

form

social responsibility.
Next, I will examine what significance is(2) Utilization of Integrated Reports at Banks

given to the roles of the integrated report asin Japan

information sharing support tool for major

In this section, I analyze the necessity ofbanks formed by merging. As examples of large-

integrated reports at banks in Japan. The

scale merging in Japan, there are three MegaInternational Integrated Reporting Frameworkbanking organizations (“Mega Banks”) born one(<IR> framework) indicated by IIRC (2013a)

after another between 2000 and 2005. The

described the objective of the integrated reportturmoil that occurred immediately after theas "to explain to providers of financial capitalmerging seems to have settled down to some

how an organization creates value over time"extent. However, it is still believed that it will

(IIRC, 2013a, p. 4 and p. 7). The <IR>take time before employees who enter as newframework defined the organizational overview

graduates after the merging become core staffs,

andtherefore it still seems to be necessary for Megabusiness

Banks to devise information sharing. According

strategy and resource allocation, performance,

to the Banking Law, Banks (and bank holding

outlook,companies)

presentation, as the eight elements of thehaveprovided

explanatory

documents that introduce their business andexternal

environment,

model,
and

risks

basis

of

and

governance,
opportunities,

preparation

andintegrated report.

financial conditions at sales offices as disclosure

According to KPMG Japan Integrated

annual reports, before Mega Banks issued

Reporting

AdvisoryGroup(2017a),279

integrated reports. Comparing the conventional

companies adopted the integrated report indisclosure magazines with the integrated

2016, and the content of the report is not only

reports, I analyzed the comparison of the two in

financial information but also a wide range. It is

the three major Mega Banks over several years.

meaningful to provide information collectively to

I focus on the content unique to the integrated

stakeholders. However, the <IR> framework

report, through the comparison, and analyze thedoes not provide guidance on the concrete

meaning of the integrated report with reference

content of the integrated report. Therefore, it isto the examples of the three Mega Banks.

also pointed out that "some adjustments are

Finally, outside of the Mega Banks, I analyze

necessary because it is impossible to compare

there is an increasing possibility of utilizing thewith other companies in different formats andintegrated report in large enterprises throughcontents of each company while recognizing

large merging. The newly formed organizations

autonomy to some extent" (Ito (Y), 2016, p. 335).

tend to have divided internal systems. For

The manufacturing industry has been

example, employees from the old predecessor

issuing CSR reports and other kinds of reports
3

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

for a long time. It is said that there isthat Mega Banks can use platform of integrated

significance in issuing it because such industry

report not only for external disclosure, but forstresses the environment with CO2 emission.

internal information sharing, and for integrated

Meanwhile, the necessity of disclosure
through

integrated

reportsfororganization operation through description offinancialrisk-related information on the RAF in theinstitutions such as banks is gradually

integrated report.

increasing. Ochi (2016) focused on the financial

Based on the above points, I will pay

bubble which formed “the structure similar toattention to the role of internal information

external issues such as the global environment

sharing support tool of the integrated report inincluding pollution” (Ochi, 2016, p. 40), because

the next section.

financial institutions grow unacceptable risks insociety in the process of generating bubbles(3) Role of Integrated Report as Information

similarSharing Support Tooltocausing

pollution.

Financial

institutions such as banks will become theIn this section, I first focus on the role of thesubject of social responsibility as well as theintegrated report as information sharing

manufacturing industry. Ochi (2016) referred tosupport tool.

the Risk Appetite Framework (RAF) 3 andAccording to KPMG Japan Integrated

introduced a movement that Mega Banks andReporting Advisory Group (2017b), as answers

other global large financial institutions, G-SIBs4,

to the question "On what point do you thinkenriched risk-related information in terms of the"Integrated Report" contributes to in improving

RAF on integrated reports from FY 2015 (Ochi,

corporate value?", “For sharing strategies and2016, p. 42). Ochi (2016) also pointed out that hepolicies within the company or the group"5 was

could expect that "disclosure of the RAF throughconsistently listed as second during the past 5

integrated report not only has an external effect,

years. I argue that this questionnaire result

but also infiltrates risk culture from the board ofindicates that the integrated report is used not

directors to the lower-level bank employees by

only as a means for disclosing information

sharing information through integrated reportoutside of the company but also as a tool for(Ochi, 2016, p. 42). Such statements indicatedsupporting information sharing with employees

3 According to the Financial Services Agency

Financial Services Agency (FSA) website(http://www.fsa.go.jp/news/27/20151204-4.html,
viewed on July 7, 2018).
5 These are the questionnaire results for theparticipants, from December 2012 to March
2017, at the seminars on integrated reportsponsored by the KPMG Japan Integrated
Reporting Advisory Group. The seminars were
held at the pace once a year with the same
theme (the venues were held at 1 to 4 places),and the number of respondents was 1,184(response rate 83%) against 1,422 participantsin the whole group. As detailed in KPMG
Japan (2017b), please see that.

(2015), risk appetite is "the type and total
amount of risk that should willingly be
accepted in order to achieve the business plan
based on the individuality of the company's
business model" (Financial Services Agency,
2015, p. 16), and the RAF refers to "theframework of business management to be used
as a common language within the company
concerning whole risk-taking policies including
capital allocation and profit maximization"(Financial Services Agency, 2015, p. 16).
4 G-SIBs refer to banks that are important on a
global system. For details, please see the4Journal of Japanese Management Vo.4, No.2, May 2020

within the company.

I

ISSN 2189-9592

amfurther

contemplating

on

the

There are examples of utilization. Nikkei BP

involvement of employees in companies. Mizuno(2015) introduced experiences of Mr. Hajime(2015) denied the idea that employees should be

Nakajima, Managing Director of Kirin Holdings,

treated merely as a functional group, andthat "I feel that I can use integrated report forreferred to executives at Idemitsu Kosan,

internal communication (Nikkei BP, 2015, p. 49).

Panasonic, and Kyocera as an example of

In addition, Fujita (2016) introduced the quotebusiness community which is a humanitarian

from Mr. Susumu Sakamoto, General Manager

company which values their employees andof Public Affairs Division in General Affairs

training

Department, Marui Group, in which employees

themselves from so-called profit maximization,

voiced their opinion, (regarding the companies

capitalism.

first ever integrated report), "I felt the

management accounting, as Human-oriented

enthusiasm of the company", "Understand andManagement

practice the content of the report, I want todefined the situation which "Values humanembody on site" (Fujita, 2016, p. 102).

respect

them.

and

In

And

they

contrasttoAccounting,familyism

distinguishedcapitalist

Mizunoas(2015)

management

Here I reconfirm the position of employees inphilosophy, ... where management managers set

the company. Without integrated report,

up a reasonable management plan, applying

companies cannot put employees as assets6 inappropriate technologies and concepts "(Mizuno,

the financial statements, and had difficulty in2015, p. 152). According to Mizuno (2015), in thedisclosing their information on employees (skills,

Human-oriented Management Accounting, theexperience, knowledge, business processing

relationshipabilities).

There were limited means toemployees, is more important than in thecommunicate. Regarding their employees which

capitalist management accounting, therefore

is as non-financial information, after various

the public relation function has greater value,transitions, companies attempt to integrate

and to create annual report with integrated

with financial information as their integrated

reporting is important. In addition, Oshika

report. IIRC (2013a) referred to human capital(2016) stated that corporate employees "should

as one of the six capitals presented in the

not be source of costs, but should be consideredframework for integrated reporting (IIRC,

as source of corporate value. It is possible for2013a, pp.

11-13) 7 .

In other words, in thewithstakeholders,

includingcompanies to coexist with employees and that is

integrated report, it can be said that employees

crucial" (Oshika, 2016, p. 208).

belonging to companies are valued as reporting

What can be interpreted from theseelements.

arguments is that the relationship with

6 Lev and Schwartz (1971) pointed out that in

7 The Ministry of Economy, Trade and Industry

economics human capital, for their employees,
is regarded as important element, however
their employees are not recognized as theirassets in financial statements. As for Lev andSchwartz (1971), since it is introduced in detailin Oshika (2016), please see that.

(2014) also raised examples showing that it isimportant to explain human resources, etc.,
which are invisible assets, by means of an
integrated report (The Ministry of Economy,
Trade and Industry, 2014, p. 82).
5

Journal of Japanese Management Vo.4, No.2, May 2020

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employees is very important in the process of

doing a job of making one page of company

corporate growth, thus it seems that it ishistory. The longer the company history, theindispensable

more the commitment to the roots of their

to

share

information

withemployees.

organization, the more inviolable value they feel,

When comprehensively summarizing theand the sense of belonging will increase. The last

above, it is evident that a role as an information

viewpoint is to have the introduction of eachsharing support tool which considers thedivision. In large organizations, each member

employees within the organization is expected

plays different roles. Because the businessfor the integrated report. Is there a possibility ofsection that is nearest to them is posted, it is anutilizing integrated reports inside of an

opportunity to look at the integrated report andorganization, such as a bank, for sharing

at the same time they will know other businessinformation

divisions in the company.

reaching

tothelower-level

employees, as mentioned in the previous

In the following sections and onwards, I willsections?

compare how the integrated report issued by

In this paper, I am going to analyze whether

Mega Banks in Japan differs from their

the integrated report holds the role ofdisclosure magazine published previously. In

information sharing support tool with theaddition, I will pay attention to the role of Mega

following viewpoints. The first viewpoint is to

Banks as information sharing support tool inhave an explicit statement of an easy-to-

the integrated report.

understandcorporatephilosophy.

In

organizations where there are a large number of(4) Transition of Issued Magazines in Mega

employees, it is an important opportunity for

Banksthem to recognize what each member should do

1. The Birth of Mega Banks and Information

for the organization by explicitly indicating the

Sharing within the Organization

philosophy that everyone can recognize. The

In Japan, the birth of Mizuho Holdings

second viewpoint is to have posting of messages(reorganized into Mizuho Financial Groupby the top of the organization. Based on the(Mizuho FG) later) was in September 2000, thephilosophy of the first viewpoint, it becomes easybirth of Sumitomo Mitsui Banking Corporation

for their employees to act by expressing and(later reorganized into SMFG) was in April 2001,

posting elements to the organization members

and the birth of Mitsubishi UFJ Financial

in specific languages. The third viewpoint is toGroup (MUFG) was in October 2005, whichhave posting of corporate history. By showing

started the current situation of three major

the history of the organization which theMega Banks existing 8 . After the merging

employees belong, they can realize that they are

between

8 In this paper, for the notation of Mega Bank,are ultimately subjective thought, except for
actual facts and data. These subjective
considerations are the comprehensive results ofmy own experiences such as working at banks
and information obtained through myrelations.

I mostly use the abbreviations, "Mizuho FG","SMFG", or "MUFG", for citations of references,
titles, clauses, etc. In addition, disclose
magazines, integrated reports, related
explanation etc., published by each Mega Bank,

6

large

banks

there

were

many

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

differences in corporate culture, in-house

Meanwhile, although from the past, Mega

reconciliation did not proceed, and sometimes it

Banks have issued a large amount of disclosure

is said that "struggle for the next president

magazines, is it worthwhile to issue an

between old banks becomes intense" 9 . It was

integrated report?

inevitable that the competition for successful

For this reason, I will briefly refer to thecareer advancement became severe. It was not

requirements of the disclosure magazine in theeasy for the employees to accept the institution /following sections and compare the elements ofcustoms

without

the disclosure magazines in Mega Bank and theresistance, and it is pointed out that suchelements unique to the integrated report, andphenomena further delayed the reconciliation10.

then I will clarify the significance of the

From this chaos, order seems to have emerged

publication of the integrated report in the Mega

to some extent, but it is still thought that it takes

Banks.

oftheopponent's

line

time for the new graduate employees after themerging to become the core member, and

2. About Disclosure Magazine

ingenuity of information sharing might still be

According to Article 21 and Article 52-29 ofnecessary.

the Banking Law, the bank / the bank holding

To the best of the author’s knowledge, each
Mega

Bank

uses

variouscompany must provide statutory documentsinternalthat explain their business and financial

communication means (for example, conference

conditions at their sales offices as a disclosurematerials, notices, e-mails, company notices,magazine.

video messages, etc.), and devises measures

The website of the Japanese Bankers

such as training together, to share information

Association has summarized the contents of thefrom the top management to the bottom

enforcement regulations of the Banking Law as

employees, in order to execute the strategy at

disclosed in Table 1 for disclosure items thatthe organization. Among them, the integrated

must be posted in the disclosure magazine.

report is assumed to have organizational
information

comprehensible

forIn terms of issuance of the settlement of theexternal

fiscal year ended in March 2017, the three major

communication because it is disseminated in an

Mega Banks issued both ‘Main Report’, whicheasy-to-understand manner, and contents are

summarized in colorful and visual design andfulfilling, therefore the integrated report can be

was about 100 pages long, and ‘Data Reference’,

utilized for sharing information internally,

which covered numerical data and was aboutenabling their employees aware of their

300 to 400 pages long, as ‘Disclosure Magazine’.

important matters anywhere11.

They position ‘Main Report’ as the integrated

9 Main article of Mainichi Newspaper (Tokyo

progress easily, thus please see that in details.
11 As a method of utilizing further integrated
reports in Mega Banks, it can be thought thatmethods such as thorough distribution to all
employees, inclusion in training, and seniorpromotion test contents can be considered in
the future.

morning paper, p. 9) on April 20, 2005,"Between former Sumitomo Bank and former
Sakura Bank, Distributed Power, Harmony
First".
10 Okumura (2009) also introduced
circumstances where integration does not7

Journal of Japanese Management Vo.4, No.2, May 2020

report(MizuhoFinancial

Group,ISSN 2189-9592

2017a;

posting of corporate history, and introducing

Sumitomo Mitsui Financial Group, 2017;

each division. Then I compare the three types ofMitsubishi UFJ Financial Group, 2017).

report, the final disclosure magazines of each
Mega Bank, the integrated reports of theTable 1: Examples of Items (business year) for which
Disclosure is Required by the Banking Law

settlement of their first fiscal year, and theintegrated reports of the settlement of the mostManagement organization
Name and address of business office
Main contents of bank's businessBusiness overview in the most recent business year
The following matters in the most recent five fiscal years(ordinary profit / loss, current profit / loss, capital, deposit
balance and loan balance, capital adequacy ratio, etc.)
The following matters in the most recent two fiscal years(balance sheet, profit and loss, gross operating profit, grossmargin ratio, fund operating balance, interest margin,balance of so-called bad debt, balance of allowance for
doubtful accounts, capital base, etc.)
Risk management system
Regulatory compliance system
Source: Japanese Bankers Association Website

recent fiscal year ended in March 2017. Amongthe Mega Banks, Mizuho FG and MUFG eachissued the integrated report from the settlementof the fiscal year ended in March 2015, on theother hand only SMFG issued the report fromthe settlement of the fiscal year ended in March2016. As the result of the comparison, I find thatthe contents which are most common to Mega
Banks are as shown in Table 2.
Table 2: Comparison of Disclosure Magazine and Integrated
Report for Multiple Years(https://www.zenginkyo.or.jp/article/tag-h/4007/, viewed on July 7, 2018)

However, there must be a difference between

Viewpoints

the content of the integrated report, which isissued by a Mega Bank as non-statutory at its

The Final

The First

The Most Recent

Disclosure (D)Integrated

Integrated

Magazines

Reports

Reports

Corporate
Philosophy

None

Described
Colorfully /Visually

Described
Colorfully /Visuallywhich is mandated to be issued according to law,Top
Message

Few

More Pages than
D Magazines(**)

More Pages than
D Magazines(**)

because the roles of two are different from each

Corporate
HistoryNone(*)

Described
Colorfully /Visually

Described
Colorfully /Visually

Introductionof Each Div.

Few

More Pages than
D Magazines(**)

More Pages than
D Magazines(**)

own discretion, and the content of the disclosure
magazine (‘Main Report’ plus ‘Data Reference’),other.
For this reason, I will compare the disclosure

Source: Mitsubishi UFJ Financial Group (2014, 2015, 2017); Mizuho
Financial Group (2014, 2015, 2017a); Sumitomo Mitsui
Financial Group (2015, 2016, 2017).
Note: (*) Only Mizuho Financial Group (2014) introduced the historyof Mizuho Group.
(**) There are 10 to 20 pages of top messages in the integrated
reports, whereas a few pages in the disclosure magazines.
There are 20 or more pages of each division introduction plus
facial pictures of division managers in the integrated reports,
whereas only 5 pages in the disclosure magazines.

magazines and the integrated reports in thenext section, and clarify new contents of theintegrated reports of Mega Banks.
3. Comparison of Disclosure Magazines andIntegrated Reports over Multiple Fiscal Years
In this section, I will analyze whether the

As the result of the comparison, the elements

integrated report of Mega Bank incorporatesof the integrated reports of Mega Banks that areelements of information sharing support tool

not in the disclosure magazine are the following

which is not included in the disclosure magazine.

four.
Corporate philosophy expressed visually

I will focus on the four viewing angles ofanalysis clarified in the previous section; having

and clearlyan explicit statement of an easy-to-understandTop Messages by CEO, CFO, etc. withcorporate philosophy, posting of top message,

more than 10 pages
8

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

Visual and easy-to-understand corporate

integrated organization operation. I think that

history, etc.

utilization of integrated report as information

Facial pictures of the division managers

sharing support tool with employees in Mega

are also posted and contents enhance each

Bank is not limited to this.

division’s introduction

As mentioned above, there are many cases

I infer that a role as an information sharing

where reconciliation within banks does notsupport tool can be expected in the integrated

proceed following the merging between large

report of Mega Banks having these elements,

banks. Meanwhile, the competition with otherbut from the next section onwards, I will analyzebanks is getting more intense, and some sort of

the role from concrete contents.

ingenuity is necessary. For this reason, it isnecessary to promptly disseminate the decisions(5) Role of Integrated Report in Mega Bank

made by the management division within the

In this section, I focus on the roles of thebank, and as information sharing support tool

integrated report of Mega Bank as information

for that, recording actions which have alreadysharing support tool, and refer to the part which

been released externally in the integrated report,

shares information inside the organization fromand shift to execution at an early stage isthe latest integrated report.

possible. In large organizations such as Mega
Banks, although it is possible to deliver

1. Necessity of Mega Bank Information Sharing

messages of top executives to all employees in

Support Tool

relay video system, it is only one-way

As I mentioned in the previous section,

instructions from the top to the bottom. It is notunless there are legal restrictions in othereasy for employees to grasp what kind of

applications (for example, the role of the bank's

initiatives their organizations have announced

disclosure magazine required by the Banking

externally.

Law), the integrated report is not a statutory

Therefore, it cannot be said clearly, but if thedisclosure material, the issuance is optional.

integrated report could act as part of a strategy

However, once the company starts to issue thetool through its information sharing capability

integrated report, they must continue issuing it

to penetrate to the lower-level employees, it

since they publicly disclose such issuance,

seems to be greatly expected that the integrated

unless an event such as delisting occurs.

reportTherefore, it is necessary for companies to beorganizations, such as the ones establishedready for sustained issuance of integrated

through large-scale merging, but still disjointed.

reports, giving it a great significance.

can

be

utilized

in

other

large

Below, I would like to refer to the information

As mentioned above, Mega Banks are tosharing within the organization through thedisseminate their risk culture from the top

latest three Mega Banks' integrated reports.

management to the bottom employees by
writing the risk-related information on the RAF

2. Mizuho Financial Groupin the integrated report, aiming to share
information

withintheorganization

Mizuho Financial Group (2017a) states theforfollowing information.
9

Journal of Japanese Management Vo.4, No.2, May 2020

<Enhance the sense of unity within theorganization>
History

introduction

since

ISSN 2189-9592

Sumitomo Mitsui Financial Group (2016) firstposted the history since the establishment in thethe

Edo-Meiji era in the pre-integrated phase, andestablishment of three predecessors in the

Mitsubishi UFJ Financial Group

Meiji era

described later, also did. It cannot be concluded

Corporate philosophy and "Mizuho Value"

yet, but such adhering to their roots, seems topostedregardIntroduction of the first or No.1 items inorganization as the inviolable values thatJapan

cannot be imitated, and to enhance the sense of

Introduction of research and consulting

unity within the organization. Also supposed toability that can differentiate from otherlead to uplifting feeling of unity may be theMega Banks

posting of corporate philosophy, introducing the<Always recognizable disclosure of internal
information>

thetraditional

history(2017),

ofthefirst or No.1 items in Japan, and introducing
research and consulting abilities that could

Introduction of management accounting fordifferentiate Mizuho from other Mega Banks.

internal numerical management

In terms of always recognizable disclosure of

Introduction of current situation analysis,

internal information, I can exemplify thatweak points and sense of direction of risk

management accounting figures for internal use

appetite, etc., detailed by each company inare introduced as shown in Table 3. Such

Mizuhoinformation is not statutory, unlike the above-

I will first analyze the content that will

mentioned items that are required to beenhance the sense of unity within thedisclosed in the Banking Law as disclosureorganization. In terms of history introduction,

magazine.

Table 3: Mizuho FG's Net Business Profit by FY 2016 in Each Company (JPY billions)
FY 2016 (result)

Retail & Business Banking Company
Corporate & Institutional Company
Global Corporate Company
Global Markets Company
Asset Management Company
In-house Company Total
Consolidated Net Business Profits

13.0
240.0
115.0
315.0
20.0
703.0
663.4

(*)

FY 2017 (planned)

47.0
218.0
123.0
219.0
24.0
631.0
640.0

Source: Mizuho Financial Group (2017b, p. 8)
Note: (*) Global Markets Company net business profits including Net Gains related to ETF is JPY345 billion (preliminary).
Recalculated the FY 2016 results based on the FY 2017 management account rules. JPY40 billion difference between In-house Company
Total and Consolidated Net Business Profits is due to adjustment of management account which is not attributable to the In-house
Companies.

Mizuho FG divides itself into several
companies,

which

are

businessanyinternal

management

includingdomainperformance evaluation by the company. It canaccording to customer attributes, like otherbe said that to publish the information ofMega Banks. Although it cannot be determinedmanagement account number, originally forbecause it is not clearly stated, it seems that theinternal use, on public information, such as

management accounting figures are used for

integrated report, aims to share information
10

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

with Mega Bank employees who can always

needs to be devised so that it does not leave away

carry it, and to make them understand thefrom employees' awareness. For the reason

current situation through it. In Mega Banks

above, although it cannot be stated, if items withfrom the viewpoint of information management,high priority are listed in published information

it is prohibited to take internal information,such as integrated reports, Mega Bank

send e-mails, etc., including bringing it to theemployees can always carry such information,

employee’s home, even if it is not personalthen Mega Banks’ information sharing could be

information or insider information. Under suchpractically possible.

circumstances,thepublicized

information

From such assumptions, the high priority

including the integrated report is not subject toissues that SMFG employees are always aware

such restrictions. Similarly, disclosure ofof are three items introduced as SMFG's DNA,

internal information that can be accessed at all

further reduction of costs, and transformation intimes may introduce current situation analysis,business portfolio. It can be assumed that there

weaknesses12, and the sense of direction of risk

is a message saying that value creation isappetite detailed by each company.

possible by being always conscious and acting onthem.

3. Sumitomo Mitsui Financial Group
Sumitomo Mitsui Financial Group (2017)

4. Mitsubishi UFJ Financial Group

states the following information.

Mitsubishi UFJ Financial Group (2017)<Issues to always be aware of>states the following information.

<Showing
commonorganization>

In the CEO message column, introductionof their DNA as "On-Site Strength",

direction

within"Spirit of Enterprise", and "Speed"

Posted a management vision stating the

Explanation of cost reduction by using

spiritual pillars of all executives anddiagrams and graphs

employees

Explanation of transformation of business

Clear statement of the MUFG value

portfolio to avoid competition with domestic

creation process

standard banks13

Introduction of about 360 years long history

Postingofmanagement

philosophy

since

its

establishmentofKonoike(including five keywords "Five Values") andexchange shop, the originator of Sanwa

value creation

Bank, MUFG

I will analyze the posted issues that should

Comparison of figures and ratings withalways be conscious of. Within the organization,

overseas financial institutions

high priority issues that should always be aware

Introduction of efforts for ESG issuesof, from the top management to the bottom,

I will analyze the presentation of the common

12 For example, Mizuho FG's Retail andIndustry Company has listed the "high expense
ratio" (Mizuho Financial Group, 2017a, p. 35)
as a weakness.
13 Domestic standard banks stand for banks

that can operate simply as compared with theInternational Unified Standards Bank, such as
Mega Banks, etc., with the capital adequacy
ratio being 4% or more.
11

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

direction within the organization. MUFG has

divided into three, using pyramid (also divided

background that was established from the giant

into three from the top to the bottom andorganization merging between the Mitsubishi

described as, "Our mission ", " Our VisionTokyo Financial Group and UFJ Holdings(aiming for medium to long term)", and "Ourthrough

Valuesbusiness

integration.

It

is

an

(we

shouldshare)"),

detailed

assumption at this point, but if they prioritize

explanations for each part, so that different

the process of getting consensus among all

ways of interpretation could not occur. In

employees in such a situation, it will take aaddition, Sumitomo Mitsui Financial Group

tremendous amount of time and effort. For that(2017)

reason, they will first present the organization's

philosophy and value creation, after the history

policy and all employees will follow that policyof SMFG and their financial and non-financial

with some minor adjustments. In order tohighlights.

also

described

theirmanagement

achieve these objectives, it may be necessary to

By showing the whole picture of the value

show common direction within the organization.

creation process and the history that has

It can be inferred that trying to share

survived for about 360 years, MUFG are trying

information

with

MUFG

employees

todescribing

suchdirectioninbyspreadthenecessityofsustainablepublisheddevelopment of the organization in the future

information such as integrated report that canwith their employees. In addition, it is assumed

always be carried out is aimed for the employeesthat making employees aware of the numericalto be always conscious of such direction.

/ rating comparisons with competitive overseas

For further analysis, I assume, the direction

major financial institutions 14 , and lettingthat MUFG would like to show in theemployees recognize efforts towards ESG issues

organization is the management vision first,

as social requirements, are what MUFG wants

which is captured at the beginning in theto have employees in the organization be aware

integrated report as the spiritual pillar of allof.

MUFG executives and employees. Mizuho
Financial Group (2017a) also posted its

5. Conclusion

corporate philosophy and "Mizuho Value" at theI analyzed the contents of the recent

beginning, and divided the triangle pyramid

integrated reports of all Mega Banks and found(divided into three from the top to the bottom

out their role of information sharing support tool.

and described as "Basic Idea", "Vision", andAs a result of this analysis, I found out that the"Value" from the top). Although using a pyramidcharacter of Mizuho FG integrated report isfor easy understanding is the same, the"Enhance the Sense of Unity within thedescription of the management vision ofOrganization" and "Disclosure of Internal

Mitsubishi UFJ Financial Group (2017) was

Information that is always accessible", the

14 According to the Nikkei Newspaper

trillion yen, which is far apart from the second
and the last. Therefore, in MUFG, No. 1 inJapan is commonplace and it can be seen thatcompetition on a global scale is inevitable.

(Morning paper, p. 19) on August 19, 2017,
market capitalization of Mizuho FG is about
4.8 trillion yen and that of SMFG is about 5.8
trillion yen, while that of MUFG is about 9.5

12

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

character of SMFG report is "Posted Issues

sufficiently recognized both internally andAlways to be Conscious of", and the character ofexternally, therefore the reports are used as

MUFG report is “Showing Common Direction

information dissemination and information

within Organization”. Although it can be

sharing support tool.

affirmed, these characters are presumed to be

Integrated report that has aspects of boththe purpose of utilizing the integrated report infinancialinformation

andnon-financial

each Mega Bank.

information enables us abbreviate the trouble ofWhat derives from the discussion so far is

examining a wide variety of disclosure sourcesthat even a huge organization other than Mega

when learning about the company's outline.

Banks can utilize the integrated report if the

Meanwhile, the company, which is originally onorganization is established through large-scale

the issuing side, can not only externallymerging but still disjointed. Japan's Megatransmit,

Banks are all established through merging ofmanagement's perspective into the bottom

large banks. Although it is difficult to harmonize,

employees by sharing information using theit is necessary to promptly disseminate thereport as strategic tool.

but

also

penetrate

the

top

decisions made by the management division

In the process of expanding companies, it isthroughout the organization. Also, it isimportant to share information with theirnecessarythat

employees. Mega Banks are expected to share

employees should always be conscious of, into anrisk information related to the RAF by postingalways accessible disclosure. In this section,on their integrated report, and to aim at sharing

without fear of criticism, I can affirm that the

information inside of the organization, andintegrated report, which is an information

further operating as an integrated organization.

transmission

Althoughtoincorporate

tool

intendedmattersfor

external

therelevanceofrisk-related

communication, is easy to utilize as information

information on the RAF to the description on the

sharing support tool within the still disjointed

integrated report is not clear, since at theorganization established through merging.

present moment there are no reports of

Although it cannot be asserted, if it has a role ininadequacies in risk governance at each Mega

the integrated report as a strategy tool toBank, therefore I assume that the description

penetrate into the lower-level employees, it can

has some effect.

be greatly expected to be utilized in gigantic

In Mega Banks, the in-house reconciliation

organizations where in-house convergences

does not proceed in many cases, thus in order tohave not progressed after large merger. This ispromptly disseminate the decisions made by thethe conclusion of this paper.

management division, the efforts that areannounced externally are described in the(6) Summary and Future Research

integrated report and the means to execute are

In this paper, I introduced the examples ofneeded. In addition, it is necessary to put down

utilizations of the integrated reports in thethe information that employees should always

major

through

be conscious of as public information that theymerging where their business contents are not

can always recognize. In fact, I analyzed the four

banks

newly

established13

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

different from the disclosure magazine, as well

(Financial Administration Policy in FY
Heisei 27). Tokyo: Financial Services

as the characteristics of each of the latest

Agency. (in Japanese)elements of the integrated report that are

integrated reports of Mega Banks, and the

Fujita, K. (2016). Kigyo Karano Comment : ESG

purpose of its utilization. As a result, I found out

Toushi-ka

tono

Settenga

Kakudaithe role of information sharing support tool with(Comments from Companies: Expanding

employees in the organization.

Contacts with ESG Investors) (Hidemi

Moreover, the conclusion of this thesis

Tomita (Eds.) "Waza-ari: Learning from theobtained through these analyses is that it isIntegrated Reporting No.6: Marui Group”).

possible to utilize the integrated report even for

Nikkei Ecology, April 2016, 202, pp. 100-

large organizations other than Mega Banks,102. (in Japanese)

which are established through large-scale

IIRC.

(2013a).

The

International<IR>

Framework, International
Reporting Council.

Integrated

companies and oil resource companies that are

Basis for
International<IR>

Conclusions;
Framework,

also established through large-scale merging

International Integrated Reporting Council.

merging but still remains to be disjointed. For
futureresearch,study

targetinghugeorganizations, such as property insurance——.

could be considered.

(2013b).

Ito, K. (2014). Kanri Kaikei ni okeru Tougo

However, at this stage, sufficient verification

Houkokuno

Igi(Importanceofof these points are yet to be completed and aManagement Accounting Research on

future task remains. For further future research,Integrated Reporting). Accounting, 185(2),developing a questionnaire would be required,pp. 160-172. (in Japanese)

which would provide primary data to determine——. (2016). Tougo Houkoku-sho ni Motozuku

if the internal and external use of the integrated

Kachi Souzou Process no Hikaku Kenkyu

reports are fulfilling the roles that I asserted in(Comparing Research of Value Creation

this paper.

Based

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Group. (in Japanese)Lev, B. and A. Schwartz. (1971). On the Use ofReport Disclosure Magazine). Tokyo:
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April 2016 – March 2017. Tokyo: Mizuho
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Sumitomo Mitsui Financial Group. (2015). 201516

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

CEO Successor Characteristics and Issues of the JapaneseManagement System: A Case of the Pharmaceutical Industry
Miyano Horiuchi
Graduate School of Business Administration, Rikkyo University
Nippon Academy of Management
Email: 17wg001k@rikkyo.ac.jp
Abstract
This study tried to figure out the issues of the Japanese management system through chief
executive officer (CEO) characteristics in the pharmaceutical industry. Comparing 164 CEOs in US,
European and Japanese firms from 2001 to 2018, the result illustrated that most of firms promoted
their CEOs internally, however, in Japanese firms, one third of the CEOs were selected from theformer CEO’s family members or an executive who was parachuted from parent firms. In addition,
it took over 22 years to be selected as a CEO in Japanese firms, which made the oldest new CEOsand retiring CEOs in the three regions. As for CEO performance, the result indicated that the older
the CEO that was selected, the lower the performance, and the longer industry tenure, the lower the
performance. These results suggested that the way to select a CEO successor in Japanesemanagement system should be reconsidered to survive in the global market by competing with US
and European firms.
Keywords: CEO Succession, CEO origin, Japanese Management Structure, Pharmaceutical Industry(1) Introduction

At that time when the Japanese industry

The Japanese economy has not been doingneeded to catch up with the industry in otherwell for a while. Since the early 1990s after thenations, such as in Europe and USA, there wereasset bubble burst, most of the industry inclear directions and goals of what to produce,

Japan has suffered a slow growth. The 1990s isdevelop and how to be efficient to achieve goals.

called the Lost Decade for Japan, and in theBusiness owners concentrated their capital to2000s, the situation is still not optimistic.

manage and develop firms to grow. There wasJapanese style management has led tono need to have their own will to find goals atcomplicated problems recently. The life time
employment,

seniority

decision-making
domestic

marketthat time.

rules,

consensus

After the asset bubble burst, Japaneseandheavilysaturatedfirms have had a hard time to keep lifetime–

innovations

of

the

employment. Some financial institutions went

management are needed, however, the changes

bankrupt, and foreign stock ownership ratio

are not enough to correct the Japanese economy.

increased. The cross-shareholding system in17

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

Japanese firms started to be eliminated.

sense, it is hard for Japanese pharmaceutical

Temporary worker’s market got bigger, thefirms to survive competition if they keep themarket of full-time workers with full benefits

traditional Japanese style management. They

and the contracted workers without benefits got

are required to communicate more often with

mixed up. People have been having a hard time

investors to raise capital, and to acquire firms

to have full benefits as a full-time worker asinternationally to expand their business.

before.

The competition of the market gets severe.

Leveraging the mobility of the labor market,

It means that firms need the better chief

the organization is now facing the time to

executive officer (CEO) 1 to manage strategy

change. To gain talented workers, firms need toand the firm. They need to be a management

have options to give out benefits not only to full-

professional. If Japanese firms keep their CEO

time workers but also to temporary contracted

as a traditional firm owner, the growth andworkers.

development of Japanese pharmaceutical firms

The way to raise the capital from thewill not happen in the future.

financial market has changed. Following theThis issue can apply to any kind of industry

change, fair evaluation of employee has started

in Japan that needs to expand businessto be required, not like the lifetime employment

internationally, not only to the pharmaceuticalsystem that never needed fair evaluation.

industry. The objectives of this study is to

Therefore, although it is still a part of theidentify the characteristics of the managementchange, the Japanese style management is

structurefacing a time to be reorganized.

pharmaceuticalofJapanese

and

firms

through2

WesternCEO

Considering this situation that Japanesecharacteristics, based on the indicators used infirms are facing, this study compares thethe upper echelon theory by Hambrick andmanagement of firms in Japan and other

Mason (1984).

regionsofthePharmaceuticalpharmaceutical
firms

are

industry.

In the upper echelon theory, Hambrick andlonger-lived,

Mason(1984)

proposed

that

the

firm

compared with the ones in other industries.

performance and the strategic choice could be

Therefore, it is a lot easier to keep the Japaneserelatedstyle management compared with a fast moving

management

industry, such as information technology (IT),backgrounds, educational levels, socioeconomic

services and consumer goods.

roots, financial positions, group characteristics

In contrast,

the investment

with

the
team.

characteristics
Their

age,

of

top

career

towards

were taken as the indicators, and the range of

research and development (R&D) of theindicators were extended by many others after

pharmaceutical industry is enormous, and there

the theory presented.

is a big chance of development failure. In this1 In Japanese firms, a chief executive officer canis defined as a CEO in the Japanese firms.

be called as a representative chairman or a2

president. In this study, the representative

Canada and Australia are categorized as

named in their homepage and the press release

Western.
18

In this study, the firms in USA, Europe,

Journal of Japanese Management Vo.4, No.2, May 2020

Although Hambrick and Mason expanded

ISSN 2189-9592

expanding their facilities and market share

the research object to the top management teamsince the 1950’s.

of the firm, CEO is the final decision maker after

CEO succession results would reflect theall. The CEO characteristics obviously relates

past conditions of the firm (Datta and Guthrie,

the firm’s strategic choices that connects to the1994). Therefore, the condition of the Japanese

firm performance. Therefore, in this study, thefirms might have not changed drastically for a

CEO characteristics were studied.

while.

This study is structured as follows. First, it

Mishina, Hino, Dan, Ashida, Ichinari andreviews the literature of CEO successions, andWang (2010) examined CEO characteristics in

the CEO characteristics in Japanese firms, thenJapanese, American and Taiwanese firms. It

in Western firms. Second, it develops acompared the CEO’s age, gender, educationalframework of the empirical research to study

background, succession origin and functional

CEO

the

background among the three countries. The

pharmaceutical industry both in Japanese andresult showed American and Taiwanese firms

Western firms. Third, it presents the analytic

had a similar way to choose CEO’s especially on

data methodology and findings. Finally, it

their education. While the most of the CEOs in

discusses the implications of this research.

Japanese firms graduated from the brand-

successor

characteristics

of

named universities and obtained only bachelor(2) CEO successions in Japanese firms

degrees, the most of CEOs in American andTanikawa (2015) examined the internal

Taiwanese firms have a masters or doctoral

promotion system of Japanese firms, based on

degree, especially in business.

the hypothesis that Japanese firms choose their

Mishina et. al. (2010) also examined 77

CEO internally unless they have a serious

CEO backgrounds of 2009 both in Japanese andfinancial crisis or face globalization3. As a result,

American firms. The result shows that one out

70% of CEOs were chosen internally in 1,832

of 44 Japanese CEOs were hired externally,

Japanese firms in 2014. In addition, 24.69% of

while 15 out of 33 American CEOs were hired

CEOs were founders of the firm. Tanikawa

externally.

predicted that internally promoted CEOs would

Japanese firms need to reform their CEO

decrease compared with 1950’s, and it did,succession system to make better use of

however the CEOs were still mostly chosenorganization ability.

The

research

concludedthatinternally although Japanese firms were
3 The definition of internally promoted CEO ishand, in the Western studies, an internallydifferent between Japan and the other countries.

promoted CEO means the CEO who were an

In Japan, an internally promoted CEO usually

officer of the hiring firm for more than one year

entered the firm right after he/she graduatedprior to their appointment, and an externalfrom the college (newly graduated – “Shin-

CEO means the CEO who had a prior history as

sotsu”.) The others who entered the firm after

an officer at another public firm, had at most one

job hopping were not counted as an internally

year as an officer at the hiring firm (Nagel, 2015).

promoted CEO (Tanikawa, 2015). On the other19

Journal of Japanese Management Vo.4, No.2, May 2020

Horiuchi (2019) researched educational
backgrounds

of

318

CEOs

in

ISSN 2189-9592

to agency problems even though they chose an

158

optimal successor internally as their CEO.

pharmaceutical firms among six international

Datta and Rajagopalan (1998) examinedregions from 2001 to 2018. The result showedthat 134 CEO successions in US manufacturingthat only 7% of CEOs in Japanese firms had afirms during the period 1977-1987. The result

degree in management while 20% of the CEOs

showed that CEOs with higher educationalin the other regions had at least one additional

levelsdegree. It clearly showed that Japanese firms

differentiation. If the industry growth rate waschose their CEOs not because of theirhigher, the age of the CEO successor was lower.

management skill.

However,

Mishina and Hino (2011) pointed out that

relatedtosamplemanufacturing

theindustry

firms

product

includedindustry,any

non-diversified,Japanese firms tend to appoint their CEO at antherefore the result did not indicate the history

older age. Many first CEOs, , the founders, hadof firms, which might affect organizationala very long tenure. The successors consequently

inertia (Hannan and Freeman, 1984).

were older when they held the CEO position. To

Furtado and Karan (1994) researched thefollow these kind of the CEO appointments,

relationship of a firm’s performance and thefirms developed an older age promotion system.

origin of CEO successions. The result showed

In the end, the experience of the CEO as top

that external CEOs were hired when the firmmanagement became insufficient and it still

had the poor accounting earnings, but this wascontinues without any change.

limited to the small firms.

These studies showed that the JapaneseOn the other hand, Georgakakis andfirms rarely changed their way to choose a CEO

Ruigrok (2017) researched 109 CEO succession

since the high economic growth era of 1950’s,

events in large international European firms

while firms rapidly expanded their businessbetweenglobally since the 1960’s (Akino, 1997).

externally hired CEOs had the performance

2005-2009.

The

resultshowedadvantage when the three conditions came(3) CEO successions in Western Firms

together. One was that the CEO and top

Lauterbach and Weisberg (1999) examinedmanagement team had similar demographic

165 top management successions in US firms

elements, such as gender, age, and nationality.

during the period 1989-1991. The result showed

The other was that the CEO needed to have athat internal successions were more likely invariety of experience. The last was that the CEOlargershould have been hired from a well-performed

firms,

which hadgood

economic

performance, and offered top management

firm in a stable industry.

positions, such as CEO, rather than managers.

Thus,

CEO

characteristic

studiesin

Also, Lauterback and Weisberg (1999)

Western firms suggest the reason why afound that external CEOs often performed

successor was chosen, the levels of thebetter than internal successions when firms had

performanceoutcomes,poor performance. It concluded that internal

characteristics

cansuccessions weaken the firm, and it might leadsuccessor. In contrast, studies in Japanese firms
20

andproduce

which
a

CEO

successful

Journal of Japanese Management Vo.4, No.2, May 2020

indicatetheconditionsofJapanese

ISSN 2189-9592

characteristics represent an organizational

management systems rather than testing adecision (Datta and Rajagopalan, 1998).

CEO’s performance or success to select a CEO.

The reason of why this study focuses on

These studies of CEO characteristics in each

the Japanese management system is that theregion demonstrate a great difference in a

pharmaceutical market in Japan had beentheory of the management literature.

shrinking compared with the past, and would
continue in the next decades due to an aging(4) Problems of Japanese pharmaceutical firms,

population

and

so

on.

The

needs

for

and CEO successions

internationalization had been identified since

The main proposition of this study is to1990’s (Mahlich, 2007). According to “Theexamine the characteristics of CEOs in the

Global Use of Medicine in 2019 and Outlook topharmaceutical industry of the world leading2023” by IQVIA 7 , the global pharmaceuticalmarkets, in particular Western countries andmarket will exceed $1.5 trillion by 2023 growing

Japan from 2001 to 2018. After the Japanese

at a 3–6% compound annual growth rates over

government announced their direction of

the next five years while Japan’s topline growthpromoting globalization of the market in 20134,

of -3 to 0%, and the medicine spending in Japan

the

of

is expected to decline by -3 to 0% through 2023,

changedlargely due to the effect of exchange rates andsurrounding

pharmaceuticalenvironment

firms

in

Japan

drastically5.

the continued uptake of generics. To survive

Looking into annual securities reports,
many

Japanese

pharmaceuticalsuch an upcoming tough environment, a strong

firms

dominant logic is required, followed by aannounced promotion of globalization in their

qualified CEO as top management (Bettis andbusiness strategies. In 2014 and 2015, 45% of

Parahalad, 1995).

Japanese pharmaceutical firms announced

In this sense, the CEOs in these regions,

expanding their business outside of the country6.

Western countries and Japan, should be

Announcing the globalizing strategies bothcompared to find the better characteristics tofor research and development and the drug

advance in the industry on their own. To

sales, the question is whether the managementcompare them, the CEO age, origin, firm andsystem in Japanese firms could change. The

industry tenure are examined following theseselection of a CEO successor and required

three hypotheses.

4

The Japan Revitalization Strategy (Cabinet

6

Decision on June 14, 2013)5

securities reports of 62 publicity listed Japanese

According to Data Book 2019 by Japan

Pharmaceutical

Manufactures

The data was collected from the annual

pharmaceutical firms in 2014 and 2015.

Association,

7 IQVIA is formerly Quintiles and IMS Health,three of top eight Japanese pharmaceutical

Inc., is an American multinational company

firms have over 60% oversea sales in 2017,serving health information technology andwhich is increased by 15% to 20% compared toclinical research.

2013.
21

Journal of Japanese Management Vo.4, No.2, May 2020

1. CEO AgeISSN 2189-9592

On the other hand, Zajic (1990) had

The aging population has been a problem in

empirical analysis and the result indicated thatJapan since 1970’s, and in 2018, the populationinternal CEOs had higher-performing firms.

aged 65 and over was 28.1 percent of the total

However, the data of this study of CEOs and the

population8.

firms occurred in 1987, so the study needs to be

According to the report of Tokyo

Shoko Research, the average age of CEOs in

updated.

Japan was 61.73 in 2018, which was the oldest

Therefore, CEO performance could besince the research was started in 2009. Also, it

different depending on tenure, however anreports that there was a correlation between theinternal CEO could perform better.

firm performance and the age of the CEO. The

H2: Internal CEOs performs better in theirolder the CEO, the lower the firm performancelater tenure than External CEOs.

became9.
Shimizu (2013) researched CEO ages and3. Firm Tenure and Industry Tenure

firm value of the 2209 Japanese firms of four

In this study, it takes the definition of theyears in 2001, 2004, 2007 and 2010. The resultinternal CEO as the CEO who transferred into

showed that there was a negative correlation

the firm and worked in another position for a

between the age of CEOs and firm value, andwhile, for more than one year prior to their

the higher negative correlation if the firm had aappointment. It means that each CEO may

higher percentage of foreign investors.

have a different tenure length, both in the firm

These studies indicated that the age ofand the industry.

CEOs and the performance could be related
negatively.

This

study

examines

The

the

CEOs

shouldbeopen-minded

regarding firm, however, they become close-

performance of each CEOs and their ages.

minded as their tenures continue (Hambrick

H1: The age of CEOs is negatively correlated

and Fukutomi, 1991). It indicates that if thewith their own performance.

CEO candidate stayed at the firm or theindustry longer before being promoted to a CEO,2. Internal Promotion

the person may develop a close-minded strategy,

Zhang and Rajagopalan (2010) reported

which leads to the lower performance.

that there was no significant difference in firm

Karaevli (2007) examined that the relationshipperformance between internal and externalof the firm performance and external CEOs for

CEOs, but in a later year of tenure, there was a

30 years in the airline industry and chemicaldifference. External CEOs got a relatively lower

industry.

performance in their later tenure, while internal“outsiderness” of the CEO did not affect the firm

CEOs kept the level of their performance

performance.

The result indicated thatthecontinuously.
8

Staticsof

BureauofJapan,agein2018),

Tokyo

Shoko

Research,https://www.stat.go.jp/english/data/jinsui/2018https://www.tsr-

np/index.html#a15k30-a [2020/1/23 access]net.co.jp/news/analysis/20190214_01.html

9 2018 nen Shacho no Nenrei Chosa (The CEO[2020/1/23 access]22

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

On the other hand, Richard, Wu andone in Canada, one in Australia, 20 European

Chadwick (2009) reported that there was afirms11 and 31 Japanese firms that were listed

positive relationship with CEO industry tenure

in SPEEDA12. These firms were publicly listed,

and the firm performance, and a negativeand had at least 20% of sales of prescription

relationship with CEO firm tenure. Theydrugs (not in generic drugs), according to thetargeted the bank industry, and gained samples

SPEEDA industry categories.

by questionnaires.

prescription drug sales and R&D were the main

H3: The CEO’s industry tenure has a positive

business focus of each firm. This study focused

relationship with the CEO performance.

on 18 years from 2001 to 2018, which spans theIt means that2010 problem of the pharmaceutical industry13.
(5) Methodology

CEOs of each firm in 18 years were studied

In this study, classifying and typifying

at S&P Capital IQ Platform 14 (hereinafterCEOs in each region based on the data, it triedreferred to Capital IQ) and a firm’s own website.

to find out the management structure difference

The names of 164 CEOs were found, and data

between Japan and Western countries. For thewas collected about age of onset as a CEO, age

Western countries, it divided into two regions,of retirement as a CEO at the firm, their

USA

and

succession origins, their firm term and industry

European countries. Therefore, firms in threeterm, and their performance. In 164 CEOs, 74

regions, Japan, USA and Europe, wereCEOs were from Japan, 34 from USA, and 56

compared. Then, it tested the hypotheses to findfrom European countries.

(plus

CanadaandAustralia)

out any relationship between CEO successor
characteristics and their performance.

2. Measures

1. Data and Sample

Age to Become a CEO: Most of the CEO’sbirth year was able to find over the internet byThis study was based on 164 CEOs in 62

their names. The birth year was subtracted

pharmaceutical firms that mainly handle

from the first year of tenure to find the age ofmolecular drugs10. They consist of nine US firms,

accession to CEO of the firm.

Mainline molecular pharmaceutical firms do

13 Most of the drugs in the table were developed

not include biopharmaceutical firms because

and launched in 1990’s, which is the time ofmost of biopharmaceutical firms focus only on

Japanese bubble economy. When we look at the

R&D, and they don’t have manufacturing

years of patent expiry, it shows the expiries

facilities.

happened right before and after 2010. That is10

11

20 European firms consist of four fromcalled “2010 problem of the Pharmaceutical

Germany, three each from England, Ireland andIndustry” in Japan.

Denmark, two from Switzerland, one each from

14

Italy, Bulgaria, France, Finland and Spain.

services company that acts as the research

12SPEEDA: Asia’s Leading Platform for

Capital IQ: A technology and financial

division

Analyses on Companies, Industries and M&AofStandard

https://www.capitaliq.com/

Deals, https://www.ub-speeda.com
23

andPoor's,Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

Age to Retire as a CEO: The birth year was
subtracted from the year of retirement as thereflect the strategy such as mergers andCEO of the firm.

Since it is difficult to compare the CEOs in theacquisitions as the result of the performance.

Succession Origin: By taking the definition

large period, CAGR for sales is used in thisin Western firms, an internal CEO was definedstudy.

as one who had been employed by the firm for at

The performance of the CEO in 2000 would

least 2 years before becoming the CEO of thehave been represented at the balance of 2001.

firm. If the CEO was hired just for the position,

This study made the balance of 2001 as theor became the CEO within a year since entering

starting period of CAGR. CAGR was calculated

the firm, they were defined as an external CEO.

as below.

Just for additional information, if the CEO wasa family member of the former CEO, orparachuted from their parent firm, it was noted.

To test the hypotheses 1-3, a correlation

Firm Tenure: It is the number of years with

was established for describing the relationshipthe firm until they became the CEO since they

between two mutually numerical dependent

were hired by the firm.

variables. A multiple regression was used to

Industry Tenure: It is the number of years
that the CEO had spent in the pharmaceuticalmeasure the relationship of internal or externalCEOs and the other variables.

industry.

CEO Performance: In this study, the(6) Resultscompound annual growth rate (CAGR) for sales

1. Descriptive Statics and The Management

during the tenure of each CEO was used to

Structure Difference by Regions

examine CEO performance. Generally, stock

The first step in the analysis was toprices are the central measure of CEO

generate the descriptive statics and to compare

performance. However, stock prices can be

the variables by regions. Table 1 shows theinfluenced by various factors other than CEO’s

descriptive statics of the sample data. It clearly

capability. Having the assets growth does notindicates that Japanese CEOs had the highest

mean that the firm’s stock price growth. Profit isnumber across the variables. The CEOs inalways controllable even though operating

Japanese firms started their position at

profit.

their older age, the oldest was at 76, and ends

The sales growth reflects CEO’s strategy

their position at the oldest in the comparison.

rather than the various market factors. It canTable 1: CEO characteristics of the pharmaceutical industry: 2001-2018
Age to Become the CEO
Total
Japan
Area USA
EuropeAge to Retire as the CEO

Firm Tenure

Industry Tenure

Mean S.D. Min. Max. Mean S.D. Min.
53.06 7.80
32
76 61.59
7.13
42

Max. Mean S.D. Min. Max. Mean S.D.
81 15.78 14.53
042 21.10 13.04

55.27

8.87 36.00

76.00 65.41

6.55 42.00

81.00 22.61

14.80 0.00

52.71

6.68 32.00

63.00 59.50

6.18 45.00

68.00 12.29

12.85 0.00

50.38

5.98 38.00

63.00 57.89

5.91 42.00

72.00

10.81 0.00

24

8.88

Min.
0

Max.
56

42.00 24.50 14.31

0.00

56.00

33.00 22.68 10.18

0.00

39.00

36.00 15.66 11.06

0.00

36.00

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

Table 2: Breakdown of CEO Origins by Regions
Internal

External

Sum% /Total

Total(N=164)

119

72.6%

JPN

64

5

5

Area USA

24

10

0

31

22

3

EuropeSum

Unknown% /Total

37

22.6%

Sum

% /Total8

4.9%

Table 3: The Detailed Breakdown of CEO Origins by Regions
Internal

Internal &Internal &FamilyParachuted
14
5

Japan

45

USA

24

0

Europe292External &FamilyExternal

External &Parachuted

Unknown

3

1

1

5

0

10

0

0

0

0

22

0

0

3

In Japanese firms, if the CEO was old atfirm tenure of 22.61 years. For the USA, 12.29

accession, he had the shorter tenure 15 . A few

years, and the shortest was 8.88 years in Europe

Japanese CEOs were promoted to the position

This result indicates that Japanese firms

over 69 years old, and retired after a few years.

preferred a CEO promoted internally as well as

However, the average CEO tenure was theworking for the same firm for a long time, which

longest in Japanese firms when comparing thecorrelates to the age of accession and retirement

age to become the CEO and the age to retire asas the CEO. If the three regions are compared,

the CEO.

the USA firms appear to prefer CEOs who knew

In contrast, the CEOs in European firms

the firm well rather than being a new employee.

stayed in their firms and the industry for the

In contrast, European firms had only about 8

shortest in these regions. The mean age toyears, which meant that no matter how long the

become a CEO was 50.38 years old, which was

person was in the firm, they had a chance tothe youngest among three regions.

become a CEO if they had the necessary ability.

The mean age to retire as a CEO was 65.41

Regarding industry tenure, in Europe andyears old in Japanese firms while the mean of

the USA, it was at least 15 years of industry

other two regions was under 60 years old. It is

experience in the pharmaceutical industry. The

obvious that Japanese firms tend to have older

means of the industry tenure was 22.68 in USA

CEOs, and they keep their position till they get

and 15.66 in Europe. It means that the CEOsaround 65 years old. It might relate to theneeded around 7 to 10-years’ experience in theofficial retirement age of Japanese firms. They

industry before joining the firm, and spent

set the retirement age at 65 years old.

another 8 to 10 years before becoming the CEO.

The mean of the firm tenure was different

On the other hand, Japanese CEOs had theby each region. Japanese CEOs had the longest

almost same firm and industry tenure. It means

15 No female CEO was found in Japanese firms

in the data.
25

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

that most of them did not work in any other firm

similar CEO successor origins, no matter if they

nor the industry before becoming the CEO ofwere hired internally or externally, there was no

their firm. Compared with USA and Europe, it

relationship with the other stakeholders such as

took more than double to become the CEO.

a family member and a parent firm. On the

Table 2 shows the breakdown of CEO

other hand, Japanese firms mainly hired CEOs

origins. The Japanese firms had the mostinternally but one third of the CEOs wereinternal CEOs, and European firms had therelated with the family and parent firms.

most external CEOs. USA firms made their
CEO profile available, therefore there was no
unknown.

It

indicated

that

the

2. CEO Successor Characteristics and CEO

firms

Performance

communicated well to the stakeholders without

Table 4 shows the correlations. There was ahiding any career history of the CEOs.

negative correlation between the age to become

Overall, most of the CEOs were internal

the CEO and CEO performance (r=-0.229). It

CEOs. However, as Table 3 shows, Japanesemeans H1 was supported, the older the CEO,firms were unique. There were 14 internal andthe lower the CEO performance although tablefamily origin CEOs. It meant that the CEO’s

5 shows the age was not significant for CEO

family member was working for the firm for a

performance.

while, then they succeeded them in the CEO

The other finding was that there was aposition after their relative resigned. Obviously,

negative correlation with industry tenure andit indicates that most of Japanese firms still

CEO performance (r=-0.178). It indicated that

depend on family style business while firms

the longer industry tenure, the lower the CEO

need a strong presence for investors, in contrast

performance, which did not support H3.

to the way that European and USA firms were

To test H2, the multiple regression analysis

taking.

was used. Table 5 shows the result. It showedThus, by observing the data of CEO origins,that there was no relationship with an internal,

it shows the difference among these threeor an external CEO and the performance. Thus,

regions. Japanese firms preferred CEOs who

H2 was not supported.

stay in the firm for a long time and promote
them internally, and it takes more than 22 years(7) Conclusion

on average. Accordingly, the age of the CEO wasThis study classified the CEOs in threehigher both to start and retire. US firms

leading pharmaceutical markets, Japan, USA

preferred CEOs who were in the same industry

and Europe, and compared their characteristics.

for more than 22 years on average, but firm

Also CEO performance was examined throughtenure was half of the industry tenure.

the characteristics to find out any relationship

European firms preferred the CEOs with muchwith their performance.

shorter tenure both in the firm and the industry.

The literature regarding CEO successions

72.6% of CEOs were internally promoted,of each region was reviewed. The Japanese

however, the characteristic itself was different

firms had not changed their way to select a CEOamong the regions. USA and European firm hadsince the 1950’s, and the analysis in this study
26

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

showed the exact same way persists in thewhich was directed to expand their business2000’s, even in the pharmaceutical industry

internationally.

Table 4: Correlations
1

2

3

4

1 Age to Become the CEO
2 Age to Retire as the CEO.484**

3 CEO Performance-.229**-0.159.451**.317**-0.112

.611

**

**

-.178*

4 Firm Tenure
5 Industry Tenure.317.626****. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

Table 5: Multiple Regression Analysis Summary
VariableAge to Become the CEO

B-0.511

Beta-0.275

Age to Retire as the CEO-0.361-0.1480.266

Firm Tenure
Industry Tenure(before becoming CEO)Internal

0.328

0.296

0.205

-0.142-0.118

0.580

2.978

0.059

0.813

External
8.693
a. Dependent variable: CEO Performance

0.149

0.567

In contrast, the literature of Western firms

p
0.150

deemed critical to survive among international

mostly examined the CEO characteristics to be

firms.

a successful successor. Taking some of theOn the other hand, when reviewing theresults of the studies, this study built

analysis, there was no relationship with CEO

hypotheses

origin and the performance. It meant thattoexamine

them

in

the

pharmaceutical industry in 2000’s.

whether the CEO was internal or external was

As a result, Japanese firms mostly chose

not a reason for low performance. Long industry

older, internal CEOs with longer industry

tenure had a relationship with performance,

tenure, which reveals a lack of experience intherefore, the lack of the knowledge of theother environments. Also one third of the CEOs

business outside the industry would be a reason

were chosen from among the former CEO’sof the low performance.

family or stakeholders of the parent firm. The

Growing firms expand the scale of theJapanese firms were continuously operated byorganization, and make functioning complicated.

someone who was close-minded. It might have

Therefore, the manager will not be able toworked well when the pharmaceutical industry

manage the firm efficiently by expanding andtargeted only domestic markets. However, inincreasing the complexity, if he/she who has

2000’s, the expansion to a global market wasinvolved himself/herself only in a specific27

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

business. In short, a management professional

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performance.

characteristics
The

way

to

relationship can be researched more.

importantbusinessstrategyintheHambrick, Donald C. and Mason, Phyllis A.

pharmaceutical industry. Depending on their(1984). Upper Echelons: The Organization as

characteristics, the way to spend on thea Reflection of its Top Managers, Academy ofstrategies may have a difference.

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Hannan, Michael T. and Freeman, John. (1984).
Structural

Inertiaand

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Mishina, Kazuhiro, Hino, Emiko, Dan, Katsuya,

Organizational

Ashida, Akito, Ichinari, Ayako and Wang Pai

Change, American Sociological Review, Vol.

Chun (2010). Kigyo Toppu no Bakku

49, No. 2, pp. 149-164

Guraundo: Nichi-Bei-Tai Hiaku (Who are

Horiuchi, Miyano. (2019). CEO characteristics

the Top Executives? Japan, United States,

comparison by region in the pharmaceuticaland Taiwan), Kokumin Keizai Zasshi, 201(3),industry: 2001-2018: Why do Japanesep. 29-47, 2010-03

pharmaceutical firms have the low sales

Nagel, Gregory L. (2015). Agency Conflicts for

growth rate in 18 years? Rikkyo DBA Journal,

Outside Directors During CEO Selection,

No. 10, p. 59-71

The Journal of Accounting and Finance, Vol.

Karaevli,

Ayse.

(2007).

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Consequences of New CEO ‘Outsiderness’:
Moderating

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Shimizu, Hajime. (2013). Do Manager's Age and

Post-

Globalization have any Impact on Firm

Succession Contexts, Strategic Management

Value? Osaka Keidai Ronshu, Vol. 64, No. 6,

Journal, Vol. 28, p. 681-706
Mahlich, Jörg. (2007). The

p. 235-246
Japanese

Tanikawa, Toshiro. (2015). Nihon teki Keiei ni

Pharmaceutical Industry in Transition: Has

Kansuru Ichi Kousatsu (A study of Japanese-

Higher Research Orientation Resulted instyle Management - focusing on internal

Higher Market Value? Asian Business &promotion system), Rikkyo Bulletin ofManagement, Vol. 6, p. 75–94

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Mishina, Kazuhiro and Hino, Emiko. (2011).

Zhang, Yan and Rajagopalan, Nandini. (2010).

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Management

Journal, Volume31, Issue3, p. 334-346(Received: January 31, 2020)(Accepted: April 19, 2020)

29

Journal of Japanese Management Vo.4, No.2, May 2020

ISSN 2189-9592

Appearance Process of Relationship between Public
Financial Reports and Local Government Bond Market:
A Statistical Study Using U.S. States’ Data
Kentaro HARAGUCHI
Faculty of Commerce, Seinan-Gakuin University
Japan Accounting Association
E-mail: haraguch@seinan-gu.ac.jp

Abstract
The purpose of this study is to examine the time-dependent relationship between
the financial conditions and bond ratings of local governments and constructhypotheses about the process. To achieve this purpose, this study investigates thetime-series behavior of the relationship between financial indicators calculated
from net asset information of Public Financial Reports (PFRs) prepared under theGovernmental Accounting Standards Board (GASB) Statement No. 34 and statebond ratings, referred to herein as the NA-BR relationship. Results of the empiricalanalysis show that the NA-BR relationship appears gradually, not immediately,
after the implementation of GASB Statement No. 34. The gradual appearance
suggests that the NA-BR relationship is caused by gradually increasing factors,
such as the variance of the financial conditions of U.S. states.
Keywords:
Public Accounting, Local Government, Financial Condition, Local Government
Bond(1) Introduction
In

2015,

local governments is an important eventtheJapanese

inInternal

autonomy for several reasons. Prior togovernment’s

Ministry

Affairs

Communications

and

of

central
(MIC)

the

the

history

earlyof2000s,

JapaneseJapanese

local
local

released uniform accounting standards

governments operated solely with afor local governments, which required

cash-basedthat public financial reports (PFRs) be

addition, PFRs lacked comparability

prepared on a full accrual basis no later

among local governments even after thethan the fiscal 2017 (MIC, 2015). This

MIC

implementation

guidelines in 2001.

of

uniform,

full

accrual-based accounting standards foraccounting

published

its

first

system.

Inaccounting

Several studies have pointed out
30that accrual-based PFRs are useful for(beforetheimplementationofassessing the financial condition of

uniform accounting standards).

thelocal governments (Wang et al ., 2007;

We would like to emphasize that

Rivenbark et al ., 2010). Of particular

uniform accrual-based PFRs were fully

importance is that PFRs enable us to

implemented in the U.S. in 1999 by themeasureGovernmental

stock-based

conditions

that

are

financialdifficult

to

be

Board

Accounting(GASB),

andStandards

the

NA-BR

measuredusingacash-based

relationship appeared in 2012. Thisaccounting

system.

Thus,

with

the

suggests the possibility of the future

implementation of accrual-based PFRs

appearance of the NA-BR relationshipin Japan, investors in bond markets are

in Japan (1) .

able

to

obtaincomparable

information

stock-basedofJapanesefinancialinterest

rates

significantly depend on bond ratings

conditions.

(Nakazato, 2008). The possibility of the

The main focus of our research is the

future appearance of the Japanese NA-

usefulness of accrual-based PFRs forBR

assessing the financial condition ofJapanese local governments with lower

local governments. In this study, we

net asset ratios should immediately

focus

assess the risk of decreasing bond

on

the

government
creditrisk,

relationshipfinancialwhich

betweenconditionisandrelationshipratings.

The

indicates

investigation

that

of

the

typically

possibility of the appearance of the NA-

represented by bond ratings. Previous

BR relationship is very important instudies on U.S. local governments shedJapan, where the uniform accrual-based

light on the relationship between PFRs

accounting

and bond ratings and showed that

implemented in 2017.

financial indicators calculated using

standard

was

just

Clarifying the factors that cause

information in the PFRs of U.S. local

thegovernments have a significant effectrelationshipon bond ratings (Plummer et al., 2007;

factors) is necessary to investigate theJohnson et al, 2012; Pridgen and Wilder,possible

2013; Callahan and Waymire, 2015).

relationship. No studies have ever tried

Haraguchi (2018a) pointed out thatto clarify these factors. This study uses

although the relationship between thea time-series analysis of the NA-BR

net asset information from PFRs andrelationship for clarification. If thebond ratings (NA-BR relationship) was

relationship appears immediately after

apparent for U.S. states, there was nothe

NA-BR relationship in Japan in 2012accounting standards, the factors must( 1) It should be also noted that the accurate

U.S. in terms of autonomy and the local government
bond markets.

prediction of this appearance is difficult because
there are many differences between Japan and the31

appearance

of

the

(hereafter,

appearance

implementation

appearance
of

of

NA-BR

the

such

a

uniform

be ones that are sufficiently present at(2) Method

the time of implementation. On the

We define a financial indicator andother hand, if the relationship appears

a bond rating indicator to numerically

gradually, the factors must be ones that

evaluate the net asset information of

are not present at implementation but

U.S. states and bond ratings in order togradually increase over time. Therefore,

analyze the NA-BR relationship.

it is necessary to elucidate whether the
relationship appears immediately or

1. Financial Indicators

gradually after implementation in ordertoclarify

theappearance

There is little agreement on what

factors.

indicators

definitively

represent

Subsequently, we must develop thefinancial condition (Wang et al ., 2007,

hypothesis to explain the appearancep.4). We use net asset ratio (NAR) to

process (appearance hypothesis) andinvestigate the NA-BR relationship, asverify it. However, as no studies havedefined in Wang et al. (2007, p.8) andever tried to conduct a time-seriesalso used in Haraguchi (2018a). The

analysis of the NA-BR relationship, thedefinitions of NAR are given below:

appearance hypothesis has never beendeveloped.

Net asset ratio (NAR)

The purpose of this study is to= Restricted and Unrestricted

develop the hypothesis through a timeseries

analysisofthe

net assets / Total assets

NA-BR= (Net assets – (Invested in capital

relationship in U.S. states and obtainassets, net of related debt))/Total

implications for Japan. The reason toassets (2)conduct this investigation in the U.S.
are as follows. First, U.S. states are

There are several reasons to use

appropriate for the benchmark because

NAR in this study, the first of which is

the

NA-BR

the importance of NAR in U.S. states.

relationship has already been clearly

To detect the NA-BR relationship, we

observed. Second, sufficient data ishave to select financial indicators thatavailable as the uniform accounting

significantly affect bond ratings. NAR

standard of PFRs was implemented 20

is adequate since the significance of theyears ago, according to Statement No.

effect of NAR on bond ratings has been

34 of the GASB (GASB34). Third, there

alreadyare(Haraguchi,

appearance

severalofthestudies

that

have

detected

in

a

past

study

2018a). Second, as

theinvestigated the relationship between

purpose of this study is to obtain

PFRs

implications for Japan through the

and

bond

ratings,

andtheaccumulated knowledge is helpful fortime-series

behavior

developing the hypothesis.

relationshipin( 2 ) “Restricted and Unrestricted net assets” iscapital assets, net of related debt)” (GASB,
1999).

equivalent with “Net assets- (Invested in

32

of

the

the

NA-BR

U.S.,

the

international comparability of NAR is

The ratings of general obligation

important. Our analysis requires us tobonds issued by S&P are used touse

sufficient

calculate RATING. A higher RATING

betweenindicates a state’s greater ability toindicatorsinternational

withcomparability

the two countries because the results of
this

study

should

be

able

to

issue bonds.

becompared with Japanese results. Thus,

3. Evaluation of the NA-BR relationshipin order to confirm comparability, theWe calculate Pearson’s correlation

indicators in this study must be verified

coefficients for each year to evaluate

to determine whether modification is

the NA-BR relationship using NAR andnecessary

RATING (COR_NAR). The correlationconsideringthecharacteristics of autonomy in eachcoefficients

country.

indicators and bond rating indicators

Using

NAR

allowsus

tobetweendevelop an argument more efficiently

havethan selecting (or developing) a newstudies (Plummer et al ., 2007; Pridgenindicator, since the comparability ofand

NAR has been already established inWaymire 2015); however, none of these

Haraguchi (2017). Third, Wang et al .

studies

examinedthe(2007) was one of the representative

behaviorof

COR_NAR.

studies that developed the method to

NARs of each year are calculated using

measurethe PFRs of the respective fiscal years.

statestheusingfinancial
PFRs.

condition

This

of

particular

The

been

financialcalculated

Wilder,2013;

states’RATINGsofinprevious

Callahan

each

and

time-series

year

The

are

study has been described as “the first

calculated using bond ratings at the end

large-scale study since the adoption ofof each year.

GASB34” (Stone et al. , 2015, p.95), anda number of studies have since made4. Datareference to it (see Kravchuk and Stone,Toexaminethetime-series

2010; Johnson et al., 2012; Clark, 2015;

behavior of the NA-BR relationship overTantardini et al. , 2017).

the long term, we selected 613 PFRs
from U.S. states for a 14-year period

2. Bond Ratings(2002–2015) in which S&P issued bondWe introduce a new indicator to

ratings for general obligation bonds.

numerically evaluate bond ratings,

Table 2 shows a list of PFRs and bond

“RATING.” Table 1 shows theratings; the former have been collected

definition of RATING.

from state government websites, andtheTable 1 Definition of RATING
bond rating by S&P
RATING

AAA
8
A+
4

AA+
7
A
3

AA
6
A2

latter

from

the

S&P

website“History of U.S. State Ratings.” Thebond ratings at the end of each year

AA5
BBB
1

(after PFRs of each year are publishedand publicly released) are used to33

calculate COR_NAR. All these PFRs are
based

on

GASB34andhavecomparability.
Table 2 List of PFRs used in this study
StatesAlabama
AlaskaArizona
Arkansas
California
Colorado
Connecticut
Delaware
FloridaGeorgia
Hawaii
Idaho
Illinois
Indiana
Iowa
KansasKentuckyLouisiana
Maine
Maryland
Massachusetts
MichiganMinnesota
Mississippi
MissouriMontana
Nebraska
NevadaNew Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
OregonPennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
n

BBR
G1
G2
G1
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G1
G2
G1
G2
G2
G2
G2
G2
G2
G1
G2
G2
G2
G2
G2
G2
G1
G2
G2
G1
G2
G2
G2
G2
G2
G1
G2

2002

2003

2004
●
●
●
●

2005
●
●
●
●
●

2006
●
●
●
●
●

2007
●
●
●
●
●
●

2008
●
●
●
●
●
●

●

●
●
●
●

●
●

●
●

●
●

●
●

●
●

●
●

●

●

●

●

●

●

●
●
●
●

●
●
●
●

●
●
●
●

●
●
●
●

●
●
●
●
●

●
●
●
●
●

●
●
●
●
●
●
●
●

●
●
●
●
●
●
●
●

●
●
●
●
●
●
●
●

●

●
●
●
●
●
●

●
●

●
●

●
●
●
●
●
●
●
●
●

●

●

●

●
●
●
●
●
●
●
●
●
●
●
●

●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●

●

●

●

●
●

●
●

●
●

●
●

●
●

●
●
●

●
●
28

●
●
33

●
●
34

●
●
39

●

●
●
●
●
●

●
●

2009
●
●
●
●
●
●
●
●
●

2010
●
●
●
●
●
●
●
●
●

2011
●
●
●
●
●
●
●
●
●

●
●
●
●
●

●
●
●
●
●
●
●

●
●
●
●
●
●
●

●
●
●
●

●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●

●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●

●
●
42

●
●
45

●
●
46

●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
48

●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
49

●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
49

34

2012
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
50

2013
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
50

2014
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
50

2015
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
50

n
11
13
14
13
14
9
7
14
14
4
14
8
14
14
14
14
10
6
14
14
14
14
14
13
14
14
10
14
14
14
13
13
14
12
14
14
11
11
14
9
11
14
9
10
14
14
11
7
14
14
613

(4) Results and Hypothesis
DevelopmentForfurtherincreaseissignificant

becauseCOR_NAR

in

2015

is

we

significantly larger than all COR_NAR

statistically examine the time-series

values prior to 2008, with the exception

behavior of the NA–BR relationshipof 2003 (i.e., the minimum value of the

using

of

confidence interval of COR_NAR in

The2015 is larger than the maximum value

calculatedof the confidence interval of COR_NAR

theanalysis,long-term

confidence

COR_NARandconfidence

intervals

intervals

COR_OR.
areusing Fisher ’s Z transformation. The

in 2007 and earlier).

results are shown in Figure 1. The error

From these results, we develop thebars show the 95% confidence intervals

hypothesis that the relationship (i.e.,of COR_NAR (Figure 1). The broken

the correlation coefficient between thehorizontal lines show the minimum

stock measurement (NAR) and the bondvalue of the 95% confidence interval of

rating

COR_NAR in 2015.

appears gradually, not immediately. We
callmeasurement
this(RATING))hypothesis

the“gradual-

appearance hypothesis.”
The gradual-appearance hypothesis
insists that the appearance of the NA–
BR relationship has been caused by
gradually

increasing

appearance

factors. This implication (i.e., “gradualincreasing of the appearance factors”)
is an important key to clarifying theappearance

factors.

As

previously

noted, as Japan has only recently
completed the implementation of fullaccrualPFRs,

clarifying

theappearance factors is very importantbecause they can indicate the future

Figure 1 Time-Series Analysis of COR_NAR

Japanese NA-BR relationship.

In Figure 1, COR_NAR in 2002 is not
significant because the minimum value(5) Discussionof COR_NAR is less than zero. In

1. Variance of NAR

addition, all of variation widths of
COR_NARinone

significant

because

year
all

are

not

error

bars

We focus on the NAR variances toclarify appearance factors because of
their importance to the relationship-

overlap with the following year.
Ontheincreases

other

hand,

COR_NARgradually

over

time;

appearance. When the differences in thefinancial conditions (i.e., NARs) among

thislocal governments are small, they will
35

have

littleeffectonbondratings

The variance “var_NAR” in eachbecause the ratings are not continuous;

year is shown as ▲, and the error bars

they are discrete values. In addition,

show the 95 % confidence intervals.

rating agencies would not reflect NARs

Figure 3 shows the plots of NARs andin bond ratings if the NAR variances are

RATINGs in each year. The confidence

not material enough. That is to say, aintervals of var_NARs are calculated

sufficient variance of PFR indicators

using the chi-square distribution.

among local governments is necessary
for

the

appearance

of

the

NA–BR

relationship. We also note that the NAR
variances indicate the differences in thefinancial conditions of the individualstates, and these are very interestingvalues to discuss policies related toautonomy. Other appearance factors
will be discussed in Section 6 as areas
for future research.
If the NAR variances have increased
gradually
appearance

over

time,

hypothesis

thegradualandtheassertion that NAR variances cause the

Figure 2: Time-series analysis of var_NAR
NA–BR
relationshipcanbeexplained self-consistently. Figure 2

Figure 3 Plots of NAR and RATING

shows the time-series analysis of the
Figures

NAR variances.

2

and

3

illustratethefollowing observations. First, var_NARs
36

in the U.S. tend to increase over timesuggests that the significant difference(i.e., the divergence of NARs). Thisbetween 2014 and 2015 is caused by the

result indicates that the stability of therestatements of GASB68 (hereafter, thestock-based financial condition tends torestatement-caused divergence).

gradually decrease, and states with

The restatements pertained to theboth higher and lower NARs haveaccounting treatment of the related

existed simultaneously in recent years.

debts derived from all activities since

As shown in Figure 3, there are several

the establishments of local governments

states in which NARs have decreased

accordingsignificantly over time, and these statesaccounting rules. This resulted in the(with much lower NARs) have driven

identification

the divergence of NARs in the U.S.

restatement-caused

Second, the differences in var_NARs

result

to

of

the
of

changehidden
the

The
is

a

financialfor each consecutive two-year period are

conditions

not significant between 2002 and 2014;

appropriately

however, the difference in var_NARs

restatements (i.e., the identification of

between 2002 and 2014 is significant.

hidden debt according to the adoption ofThis result shows that NARs in U.S.

GASB68). S&P incorporated GASB68

states have diverged over the long term

for analyzing pension liabilities and(over ten years) (hereafter, the long-

deciding credit bond ratings for states

term divergence of NARS). On the otheraccording to S&P (2013).

hand,

the

differenceinvar_NARs

Both

of

each

the

debt.

divergencereflecting
of

of

state

more

the

PFR

following

these

two

types

of

between 2014 and 2015 is significant,divergences are caused by long-term

unlikeNAR variations (greater than one year).

in

other

time

periods.

The

divergence of NARs between 2014 andThis2015 is assumed to be caused by theincrease of var_NAR in the U.S. wasrestatement

caused by the long-term accumulation

of

the

net

asset

means

that

information for the beginning value ofof NAR variations

2015 PFRs according to the adoption of

2015.

the

significant

between 2002 andGASB68, which changed the accounting

The fact that the differences inrule for defined-benefit pension plans.

var_NARs over the long term (short

We recalculate NARs and var_NARsterm) are significant (not significant)by adding (subtracting) the decreasedmeans that the short-term variations of(increased) value of net assets derived

NARs are significantly lower than long-

from

term

these

restatements

to

the

variations.

smaller

short-term

var_NARs

numerator of the NARs in 2015 anddifferences

verify the effect of these restatements.

(the larger differences in long-term

The

recalculated

var_NARs) arose from the fact that

var_NARs between 2014 and 2015 is notthere are few (several) states in which

difference

significant.

This

in

resultstrongly

inThe

their NARs varied drastically.
37

States receive cash inflows from tax

Therefore,cash-basis

financialnottorevenues each year. This is consistentstatementswith our results suggesting that short-material

term variations in stock-based financial

conditions. On the other hand, accrual-

conditions (NARs) are small. On thebasisother hand, it is interesting that themight be able to detect them. Our

accumulation of these small short-time

findings suggest the necessity of PFRs

variations (i.e. long-term variations)toseriously

conditions of local governments and theworsenedstates’financialconditions.

aredeterioration

financialmeasureinstatements

stock-based

detectfinancial(PFRs)

financialdifficulty of measuring them without

As stated above, the correlation

PFRs. The measurability of PFRs is

coefficients of NARs and RATINGs haveimportantbeen significantly positive in recent

deciding bond ratings.

years.

able

Thechangeinforratingagenciesinfinancial

It should be noted that there areconditions significantly affects states’

some restrictions for PFRs and theirfinancialusefulness for rating agencies. PFRs

management,asratingagencies tend to decrease the bondmust

ratings

comparability between each state sinceofstateswithworsenedfinancial conditions.

creditFollowing the previous discussion,
we

would

like

have

to

emphasize

sufficientbondratings

accuracyareandrelativevaluations. Without these, PFRs cannot

thebe used for deciding bond ratings,

importance of PFRs in contrast to theparticularly in cases where PFRs are

cash-based

based on different (not uniform) models.

financialstatements

historically used in Japan. Financial

PFRs

based

on

the

uniform

statements of local governments areaccounting standards with sufficient

dividedaccuracy

intocash-basis

financial

andcomparability

providestatements and accrual-basis financial

information on stock-based financial

statements (i.e., PFRs in this study).

conditions and variances (i.e., detection

Cash-basis

areof states where NAR has deteriorated).

able to measure single-year variations

This information contributes to thein financial conditions. However, theybond rating decision of rating agencies

are not able to measure the cumulativeand should result in downgrades forvalue of these variations. As statedstatesabove, the single-year variations ofconditions and the appearance of thestates’

NA-BR relationship.

financialfinancialstatements

conditions

aregenerally small, and the measurement

This

with

resultworsenedsheds

financial

light

on

the

of the accumulated variations over aimportance of measuring the stock-

longer period is necessary to detect any

based financial condition of states andseriousthe decision-usefulness of PFRs. In

deteriorationoffinancialconditions.

addition,38

thegradualincreaseofvar_NAR self-consistently explains our

implementation). These results suggest

findings;

NAR

appearance

variancefactors

relationship,andrelationshipappears

of

is

one

of

that the variances of NARs in Japan are

the

NA-BR

generally smaller than in the U.S.

NA-BR

However,thegradually

over

the

possibilityoffuturedivergence of NARs in Japan cannot be

time.

denied.
We

2. Implications for Japan
With

specificshould

also

focus

on

the

significant effect of the restatements byreference

tothe

GASB68

in

the

U.S.

There

is

no

relevance to Japan, Haraguchi (2018b)

possibility for similar restatements inrevealed that the NAR variance ofJapan

Japanesewasgovernments do not owe debts related tosignificantly smaller than that of U.S.

defined benefit pension plans; however,states in 2012. Haraguchi (2018b) also

there are several possibilities for otherpointed out that strict balanced budget

hidden debts unique to Japan. For

requirements

local

example, Japanese uniform accounting

governments, as defined by Japanesestandards allow local governments tolaws, can decrease the NAR variance.

account for obligations of lump-sum

The Japanese Local Autonomy Law

payments as the total value of lump-states that the expenses in each fiscal

sum

year

the

employees retire at the end of the year.

revenues of the current fiscal year. In

The amount of these obligations may

addition, the Japanese Local Financevary significantly when the accounting

Law asserts that the purpose of issuingstandards

debt is limited, in principle, to thediscounted cash flow method.

local

shall

purchasegovernments

among

be

or

infrastructure.

Japanesefinancedwithmaintenancesince

payments

Japanese

assuming

require

the

use

local

that

of

all

the

of

Another example is an obligatory

These

piecesofassurance (OA) for a multi-year project

effectively

restrict

allof Japanese local governments. The

fromJapanese Local Autonomy Law states

carrying over deficits into the nextthat a local government must obtain afiscal year and signify that the balanced

local assembly’s approval for OAs whenbudget requirements of Japanese local

there is a possibility of future payments

governments are very strict. Haraguchi

from the local government. Japaneseand Oishi (2019) investigated NAR

uniform accounting standards require

variances in Japan and the U.S. They

local governments to count only defined

found

OA

legislation
Japanese

local

that

the

governments

NAR

varianceinamounts

as

and

of

not

Japanese local governments is much

undefined

smaller than in U.S. states in both 2012

included. This means that amounts of(beforefuture payments that can vary slightly,

implementationof

uniform

accounting standards) and 2017 (after

such
39

as

amounts

obligations,payments

for

OA

are

construction

projects continuing for several years,

decision, they form a core part of the

may not be accounted for as obligations.

information infrastructure of the bond

These unaccounted future payments

market in Japan.

may cause obligation amounts to vary
when accounted for using adequate(6) Summary and Future Research

estimations.
Our

This study investigated the time-

resultssuggestthat

futureseriesbehavior

of

the

NA-BR

amendments of Japanese accounting

relationship in U.S. states in order tostandards

PFR

construct a hypothesis that explains therestatements may cause variations inappearance process of the relationship.

stock-based financial indicators of local

We

governments. As stated above, we note

hypothesis” stating that the NA-BR

that single-year variations in financial

relationshipconditions of U.S. states are generally

immediately, after the implementation

small, and those of Japanese localof the uniform accounting standards. In

governments may be similar because ofaddition, we revealed the possibility

the stabilizing mechanisms used inthat the gradual appearance of the NA-

local government finance, such as tax

BRallocations

national

gradual increase of the NAR variance bygovernment. Thus, the possibility of theconfirming that the variance of NARs in

future divergence of Japanese NARs

themay be decreased but cannot be denied,results suggest that PFRs based on thesuggesting the possible appearance of

uniform standard bring information to

the NA-BR relationship in Japan.

ratingThe

that

result

from

in

the

implementation

built

the

appears

relationshipU.S.

“gradual-appearanceisincreasedagencies

gradually,

caused

over

that

by

time.

is

not

the

Our

usefulinofJapanese

deciding bond ratings. It is also noted

uniform

PFR

accounting

standards

that these results imply the possibility

revealsthestock-based

financialof future appearance of the NA-BR

local

relationship in Japan and contribute to

sufficientestablishing the significance of theconditionofgovernments

Japanesewithcomparability and can provide usefulimplementation

information to rating agencies for bondstandards. This study offers a new

rating decisions. As stated above, ourperspective on time-series behavior for

results suggest that the variances inthis topic, and the evidence we provide

stock-based

will contribute to clarifying the utility

financialconditions,observed through the implementation oftheuniform

gradualstandards,

appearanceofcaused
the

of

the

uniformof PFR information in bond markets.

the

However,

additional

studies

are

NA-BR

needed for further verification of therelationship in U.S. Not only can PFRs

gradual-appearance hypothesis. First, abased on uniform accounting standards

time-series analysis of the Japanesebring useful information for the ratings

NA-BR
40

relationshipisneeded,especially after the implementation ofcancellation.

the uniform PFR standard, to verify theclearly identify the reason for theapplicability of the hypothesis. Thiscancellation,

study only investigatedthe NA-BR

statistical

relationshipstates.

further investigation.

in

U.S.

The

However,andwecannottheoretical

and

are

for

analysesneededclassification analysis in the U.S. can

Finally, the effect of other PFR-

be also useful to verify our conclusion

based financial ratios should be alsothat the NAR variance causes the NA-

investigated

BR relationship. By classifying thegradual-appearance

states into two groups, states withapplicable to ratios other than NARs.

toverifywhethertheory

can

the
be

lower NAR variance and states withhigherNAR

variance,wecanAcknowledgements

investigate the appearance process of

The original version of this paper

the NA-BR relationship for each of the(Haraguchi, 2019) was published in

respective groups over time.
Second, further clarification of the

Accounting Progress and won the Best
Paper Award at the Japan Accounting

appearance factors is important. There

Association (JAA). The article in thiscan be several appearance factors otherjournal is an English translation ofthan NAR variance. The cancellation ofHaraguchi (2019) and published withdivergence

financial

the recommendation of the president of

indicator evaluation and a bond rating

JAA. The author would like to thank theevaluation is an example. The NA-BR

president. This research was partiallyrelationship will not appear without the

supported

cancellation of divergence. A state with

Endowment of Kyoto University anda lower financial indicator evaluation

JSPS(i.e., NAR of the state is lower than that

JP19K23214.

betweenaby

MizuhoKAKENHI

Securities

Grant

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