Main banks’ influence on financial reporting quality in Japan

ABSTRACT

This study investigated main banks’ influence on the quality of accounting firms’ audits and corporate firms’ earnings, focusing on companies on Japan’s Nikkei 500 index. We posed three questions in this research study about main banks’ influence on corporate clients’ earnings management. First, does a weakened main bank relationship influence corporate clients’ financial reporting quality? Second, does Japan’s firewall deregulation influence firms’ earnings quality? Finally, does the relationship between accounting firms and main banks affect client firms’ earnings quality? Our main findings were that main banks are not related to client firms’ earnings management; however, main banks mitigate client firms’ earnings management after firewall deregulation. On the other hand, firewall deregulation does motivate firms to manipulate their earnings management. Finally, using Pong and Kita’s (2006) study as a framework, we found that main banks and client firms using the same accounting firms had no influence on earnings management. Based on these evidences presented, our findings suggest that the quality of corporate clients’ financial reporting changes before and after firewall deregulation.

KEYWORDS:

• Earnings management
• financial reporting quality
• main bank

JEL CLASSIFICATION:

• M41
• M42
• M48

Acknowledgements

Thanks to Katsumasa Suzuki’s too much kindly help, we could use EOL database freely. The authors also appreciate the helpful comments and suggestions from two reviewers, Guan-Syun Wu and Yung-Ming Shiu. All errors are the responsibilities of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The sample of financial institutions might include securities companies and insurance companies in Shuto (2006).

² These financial institutions also might include securities companies and insurance companies.

³ Iwasaki (2009) used the Nikkei 500 index to detect earnings management among Japanese listed firms. In the United States, Klein (2002) used the S&P 500 to analyse earnings management.

⁴ Klein (2002) used absolute discretionary accruals as a proxy for earnings management. Thus, we employed absolute discretionary accruals as a proxy in this study.

⁵ The main bank is the largest stockholder and appoints outside directors and outside corporate statutory auditors. This is the main difference in this research versus previous research (Iwasaki 2009; Yazawa 2004).

⁶ The fiscal year end is 31 March. For instance, the 2010 sample is from 1 April 2009 to 31 March 2010. As deregulation occurred in June 2009, we compared pre-deregulation (2008–2009) and post-deregulation (2011–2012).