Accounting Conservatism and Income Smoothing after the Japanese Sarbanes– Oxley Act

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Ian Eddie


Manuscript type: Research paper
Research aims: The Japanese Sarbanes-Oxley Act (J-SOX) was
implemented for the fiscal years ending on or after March 31, 2009 to
ensure the reliability of financial reporting by listed firms. This study
examines the effect of J-SOX on financial reporting quality, proxied by
accounting conservatism and income smoothing.
Design/Methodology/Approach: This study conducts empirical analyses
using a sample of Japanese listed firms with fiscal year-ends of March
31 from 2007 to 2010. We obtain financial data and stock price data from
the Nikkei NEEDS Financial QUEST, stock return data from NPM Monthly
Stock Return Data, and auditor data from eol. The sample consists of 7,752
and 7,594 firm-years regarding accounting conservatism, and 7,380 firmyears
regarding income smoothing. We perform multiple regression
analyses with a dummy variable for the post-J-SOX period to compare
the levels of accounting conservatism and income smoothing between the
pre- and post-J-SOX periods.
Research findings: We find that accounting conservatism increased and
income smoothing decreased immediately after J-SOX implementation.
In additional analyses, we extend the sample period to 2012 and find
the evidence indicating that the increasing effect of J-SOX on accounting
conservatism may have persisted, but the decreasing effect on income
smoothing has not persisted. These findings suggest that financial
reporting quality in Japanese firms may have improved following J-SOX
implementation through increased accounting conservatism (timely loss
Theoretical contribution/Originality: This study adds new evidence
to the literature regarding the effect of internal control regulations on
managerial accounting behaviour.
Practitioner/Policy implication: Our findings suggest that J-SOX may be
effective in improving financial reporting quality although the procedures
are relatively concise. Therefore, policy makers and accounting standard
setters should consider not only strictness but also cost-effectiveness.
Research limitation/Implications: We cannot rule out the possibility that
factors other than J-SOX occurred during our study period affected our


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