Income Smoothing Using Reserve Accounts By Japanese Companies
Authors: Kwak Wikil , Lee Ho-Young 
Published: February 2016

<p class="MsoBodyText3" style="line-height: normal; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-family: Times New Roman;"><span style="font-size: 10pt; mso-bidi-font-style: italic;">This paper </span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">examines</span><span style="font-size: 10pt; mso-bidi-font-style: italic;"> </span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">income-smoothing </span><span style="font-size: 10pt; mso-bidi-font-style: italic;">by Japanese firms using several reserve accounts. </span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">Previous</span><span style="font-size: 10pt; mso-bidi-font-style: italic;"> studies investigate</span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">d</span><span style="font-size: 10pt; mso-bidi-font-style: italic;"> the incentives for Japanese managers to smooth income using sales of assets</span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">, discretionary </span><span style="font-size: 10pt; mso-bidi-font-style: italic;">accounting accruals </span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">or </span><span style="font-size: 10pt; mso-bidi-font-style: italic;">depreciation charges under different operating environments</span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">.</span><span style="font-size: 10pt; mso-bidi-font-style: italic;"> </span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">Discretion</span><span style="font-size: 10pt; mso-bidi-font-style: italic;"> </span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">in</span><span style="font-size: 10pt; mso-bidi-font-style: italic;"> reserve accounts </span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">as a means of income-smoothing, however, </span><span style="font-size: 10pt; mso-bidi-font-style: italic;">has not yet been investigated</span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">.</span><span style="font-size: 10pt; mso-bidi-font-style: italic;"> </span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;">Understanding Japanese </span><span style="font-size: 10pt; mso-bidi-font-style: italic;">managers&rsquo; earnings management</span><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;"> via reserve accounts is particularly interesting because of the unique legal environment for reserve accounts. We find that income-smoothing via reserve accounts is associated with size, tax, capital intensity, operating deviations, leverage, earnings variability, and securities offerings. When we partition the sample to take into account the substantial structural changes in Japan in 1990, the effects of several variables appear to be different over the two periods</span><span style="font-size: 10pt; mso-bidi-font-style: italic;">.</span></span><strong><span style="font-size: 10pt; mso-fareast-font-family: Batang; mso-bidi-font-style: italic; mso-fareast-language: KO;"></span></strong></p>