“Big Bang” Accounting Reforms in Japan: Financial Analyst Earnings Forecast Accuracy Declines as the Japanese Government Mandates Japanese Corporations to Adopt International Accounting Standards |
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| Institution: | 1. Indian Institute of Management, Ahmedabad, India;2. International Management Institute, New Delhi, India;3. Indian Institute of Management, Bangalore, India;4. Indian Institute of Technology, Kharagpur, India;1. Friedrich-Alexander University Erlangen-Nürnberg (FAU), Department of Insurance Economics and Risk Management, Lange Gasse 20, 90403 Nuremberg, Germany;2. Aarhus University, Department of Economics and Business, Fuglesangs Allé 4, Denmark;1. University Autónoma of Madrid, Spain;2. University of A Coruña, ITMATI and CITIC, Spain;1. Department of Mathematics & Information Technology, Hong Kong Institute of Education, Tai Po, N.T., Hong Kong;2. Department of Statistics, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong;1. School of Business, Renmin University of China, Haidian District, Beijing 100872, China;2. School of Accountancy, Shanxi University of Finance and Economics, Wucheng, Taiyuan 030006, China;3. School of Accountancy, Central University of Finance and Economics, Haidian District, Beijing 100081, China;4. Gordon Ford College of Business, Western Kentucky University, Bowling Green, KY 42101, Unites States |
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| Abstract: | The mandated adoption of International Accounting Standards (IAS) for Japanese corporations did not result in improved earnings that forecast predictability. These findings contradict the research findings of Ashbaugh and Pincus (2001). Herrmann, Inoue, and Thomas’ (2003) research findings support the need for mandating the adoption of IAS. They found that Japanese managers were “manipulating” reported earnings by managing the sale of fixed assets and marketable securities. Adoption of IAS decreases the availability of this practice and it was and is expected to increase disclosure and transparency. Increased disclosure and transparency are expected to decrease financial analyst forecast errors, which did not decrease for 139 firms examined in this study for the timeframe of 1999–2002. This research finding does not support the idea that adoption of IAS improves financial information used in decision making relative to forecasting earnings. Assuming that increased predictability indicates higher quality reported earnings and enhanced usefulness of financial information, the mandated adoption of IAS did not result in these. Assuming that adoption of IAS in Japan increased the level of transparency and disclosure by Japanese firms, which made it harder for Japanese firms to manage their earnings in order to meet the managerial earnings forecasts that these firms must make. Thus, after the adoption of IAS in Japan, forecast errors for managerial forecasts of earnings increased. This evidence is new to the literature. |
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