2012 Fiscal Year Final Research Report

An empirical analysis on earnings management of unlisted firms

Research Project

Project/Area Number	22730354
Research Category	Grant-in-Aid for Young Scientists (B)
Allocation Type	Single-year Grants
Research Field	Accounting
Research Institution	Kobe University
Principal Investigator	SHUTO Akinobu 神戸大学, 経済経営研究所, 准教授 (60349181)
Project Period (FY)	2010 – 2012
Keywords	非上場企業 / 利益調整
Research Abstract	Previous studies have shown that, compared with earnings distributions in other countries, there are clear discontinuities at zero in the distribution of earnings levels in Japanese firms (Thomas et al. 2004; Suda and Shuto 2007; Shuto 2009). We predict that two unique institutional factors in Japan . (1) the alignment between financial and tax accounting, and (2) the tight relationship between firms and their banks . cause the discontinuities in earnings distribution. Consistent with this prediction, we find that firms with high marginal tax rates and tight relationships with their banks are more likely to manage earnings to report slightly positive earnings. We also find that this relationship is more pervasive for private firms than public firms. We contribute to the literature by examining a significant research setting that has features of both institutional factors and loss-avoidance behaviors to enable deeper consideration during hypothesis development.