Some oughts on Accounting Research in Japanese Settings
R E. V*C WThe Wharton School
UNIVERSITY OF PENNSYLVANIA

Kellogg School of Management
NORTHWESTERN UNIVERSITY

ABSTRACTAs the first English publication focusing on Japanese accounting research, we believe that
one of the long-term goals for this journal is to help build an indigenous research culturethat attracts an international audience. In this paper, we provide some thoughts on 1)
identifying Japanese settings that may offer unique advantages and merit specific analysis;and 2) the ongoing convergence to International Financial Reporting Standards (IFRS).

1. General Research Issues at Can Be Addressed with Japanese Settings
One unique advantage of Japanese accounting research is the opportunity to use Japanesesettings and data to address research issues of interests to an international audience that would be
difficult or impossible to test otherwise. In these natural settings, participants face real economicincentives; therefore, consequences and their actions can be observed over time. In addition,knowledge of the local institutional environment is crucial for making research design choices andcorrectly interpreting the results. In this section, we discuss as examples two distinctive disclosure
features in Japan that one might exploit to address research issues of general interest.
Most academic research on management forecasts has been conducted on U.S. firms; hereresearchers place a considerable amount of emphasis on self-selection issues associated with providing
voluntary management forecasts.1 One distinctive disclosure feature in Japan is that the Japanese
Securities and Exchange Law requests that firms disclose publicly annual management forecasts of
key accounting figures. Consequently, management forecasts of the upcoming year’s sales, net incomeand dividends are announced simultaneously with last period’s actual accounting data in annual andsemiannual press releases. is unique practice in Japan makes it possible to conduct large-scale,powerful studies on management forecasts over an extended period of time, and enables researchers
to address interesting, unresolved questions in the extant literature.
For example, when management forecasts assume a role that approximates mandatory* Corresponding Author. Address University of Pennsylvania 1322 Steinberg Hall-Dietrich Hall, 3620 Locust Walk, Philadelphia,
PA 19104-6365, USA.
Telephone (215) 898-6976 E-mail verrecch@wharton.upenn.edu
1See Hirst, Koonce and Venkataraman (2008) for an extensive review.
Copyright©2011 Research Institute for Economics & Business Administration - Kobe University.

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disclosure, how do they interact with other sources of information such as analyst forecasts? Arethey complements or substitutes? Are they more informative? If (and when) do managers have theincentive to bias the forecasts? Heinle and Verrecchia (2011) investigate a variety of factors thataffect management forecast bias, both under a situation where all firms are required to disclose anda situation where only some firms choose to disclose. e Japanese data, combined with the U.S.
data, enable researchers to conduct empirical tests for the different predictions in the model. elong time-series management forecasts data also allow researchers to examine the iterative nature ofmanagement forecasts - that is, managers may establish a certain forecast style (Yang, 2011). Finally,an additional empirical advantage is that management forecasts data provide a direct measure ofmanagement’s expected future performance rather than requiring a proxy to be generated for these
expectations.2
e second distinctive disclosure feature is the channel and level of communication between
managers and shareholders in Japan, particularly for firms belonging to an industrial grouping (i.e.,keiretsu). Dewenter and Warther (1998) make reference to the “complex web” of interactions thatgenerate a free, constant, and heavy flow of information between the firm and its major shareholders.3
Consequently, the basic assumption that underlies a U.S. setting that the level of adverse selection
between managers and shareholders is severe may not be as pervasive for Japanese firms in general,and keiretsu firms in particular. At the same time, the information asymmetry between different
classes of investors may be more pronounced in Japan as the major shareholders have direct,
private access to “insider information” regarding the firm’s performance and opportunities. Several
interesting disclosure-related questions arise from this unique institutional feature.
First, how does the private information channel affect the quantity and quality of public
disclosure? On the one hand, information sharing with major shareholders may reduce themanagers’ incentives to provide information to the market, suggesting that keiretsu firms discloseless information than other firms. Others argue, however, that the keiretsu corporate structures may
promote better public disclosure due to the high level of monitoring provided within the corporategrouping.
Second, what is the effect of selective disclosure on the local capital market? Are these effects
desirable? Why isn’t a disclosure regulation similar to Regulation Fair Disclosure in the U.S.
promulgated in Japan to level the playing field for all investors? Assuming this is an economy-wide
equilibrium outcome, do researchers need to develop separate disclosure theories for countries where
the financial reporting environment was developed to suit the needs of stakeholders other than public
investors?
ird, recent theoretical studies provide new insight on when information asymmetry plays arole in equity markets (Lambert, Leuz and Verrecchia 2011; Lambert and Verrecchia 2010). Whenequity markets are perfectly competitive, information asymmetry has no separate effect on the cost ofcapital. When markets are imperfect, information asymmetry can have a separate effect on firms’ costof capital. Two empirical studies provide some evidence consistent with the theory using U.S. data.4
It would be an interesting extension to test whether or not the insight offered in these theoreticalstudies also applies outside of the U.S. Japan is a good choice because of its market size and depth.
In addition, the more pronounced information asymmetry amongst shareholders and differences inFor example, Herrmann, Inoue and omas (2003) leverage the management forecasts data to investigate Japanese managers’ useof income from the sale of fixed assets and marketable securities to manage earnings.
3Dewenter and Warther (1998) emphasize this feature to test competing theories on firm’s dividend behavior.
4See Armstrong, Core, Taylor and Verrecchia (2011) and Akins, Ng and Verdi (2011).
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market competition in Japan provide a potent treatment effect.

2. Convergence to IFRSJapan has taken major steps towards mandatory IFRS adoption for all Japanese listed firms by2016. e Minister of Financial Services announced in June 2011, however, that mandatory IFRS
adoption will be postponed. We believe there are many research opportunities as future decisions
unfold. First, accounting standards in Japan have been developed extensively over the last 10-15years, and based on the “Tokyo Agreement,” most of the accounting differences should have beeneliminated by now.5 Under these conditions, what were the concerns of the various constituents overmandatory adoption? Second, the extant literature highlights that seemingly similar accounting rules
can be implemented very differently. For example, Skinner (2008) shows that, at least with respect
to deferred taxes, the Japanese adoption of rules that on the surface appear similar to those in otherregimes does not necessarily result in the equivalence of accounting practice. Based on this evidence,
what are the most important institutional impediments? Are the impediments simply transition
problems that will diminish, or are they deep-rooted and will remain without intervention? Finally,
the use of IFRS was introduced on a purely voluntary basis in March 2010. Researchers can begin tolearn from Japanese firms’ voluntary adoption behavior, which should provide some initial evidence
on the cost-benefit trade-off for IFRS adoption.

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5In August 2007, the Accounting Standards Board of Japan and the International Accounting Standards Board reached the “TokyoAgreement”; under this agreement 26 major differences between Japanese GAAP and IFRS would be eliminated by the end of2008, with the remaining differences being removed by June 2011.