Tomomi Takada

Managerial Ownership and Accounting Conservatism in Japan: A Test of Management Entrenchment Effect

We examine the effect of managerial ownership on the demand for accounting conservatism in Japan. We find that within the low and high levels of managerial ownership, managerial ownership is significantly negatively related to the asymmetric timeliness of earnings, which is consistent with the implication of the incentive alignment effect. We also find a significant positive relationship between managerial ownership and the asymmetric timeliness of earnings for the intermediate levels of managerial ownership, as suggested by the management entrenchment effect. These evidences suggest the possibility that accounting conservatism contributes to addressing the agency problem between managers and shareholders. Copyright (c) 2010 Blackwell Publishing Ltd.

How Do Regulation and Deregulation of Audit Fees Influence Audit Quality?: Empirical Evidence from Japan

The Japanese Institute of Certified Public Accountants (JICPA) formerly issued a standard audit fees table in accordance with the Certified Public Accountants Law. This table was intended to serve as a reference for the determination of audit fees, but in practice, the standard fees were applied frequently as substantive upper limits. The table was criticized and blamed for low fees and, thus, inefficient audit services. In response to this criticism, the Certified Public Accountants Law was amended in 2004, and the JICPA discontinued the issuance of the table, and audit fee pricing was no longer quasi-regulated in Japan. In this work, we examine the effects of (de)regulation on audit quality in this institutional setting. We specifically investigate the effects of low audit fees on audit quality prior to deregulation and the effects of higher fees on audit quality after deregulation. We use the accrual quality measure of Dechow and Dichev to capture audit quality. The results show that high fees, not low fees, correlate with poor accrual quality during the period of regulation and accrual quality decreases when audit fees increase after implementing deregulation.

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.