Kazuyuki Suda

Accounting Conservatism in Japan: Time Series Analysis of the Asymmetric Timeliness of Earnings

We examine time-series variations in accounting conservatism in the Japanese market. Previous studies have found that the Japanese market has low accounting conservatism. Over the last 30 years, however, the Japanese market has experienced significant institutional changes. Thus, we examine whether accounting conservatism in the Japanese market varied over the period 1979-2007. To quantify accounting conservatism, we use the model developed by Basu (1997), known as “asymmetric timeliness”. Because the market-to-book (MTB) ratio is an alternative measure of accounting conservatism, and Roychowdhury and Watts (2007) find a cause-and-effect relationship between asymmetric timeliness and MTB, we also investigate whether institutional changes affect this relationship.To assess institutional changes in the Japanese market, we highlight the code law origin and corporate governance, litigation risk, GAAP rules, the boom and bust economic cycle, and ownership structure. These factors are interrelated and mutually influence the asymmetric timeliness of earnings. We divide our sample period into four (1979-1984, 1985-1990, 1991-1999, 2000-2007), based on variations in these factors. We find that Japanese firms exhibit asymmetric timeliness, regardless of the investigation period, and the fourth period exhibits the highest asymmetric timeliness. Our analysis reveals that GAAP rule amendments around 2000 had considerable effects on this variation in asymmetric timeliness, although it seems unlikely that it was the only factor. Further analysis demonstrates that the boom and bust economic cycle weakened the cause-and-effect relationship between asymmetric timeliness and MTB.