An Institutional Review of Earnings Quality in Japan

Abstract

Despite its sophisticated markets and information dissemination systems, corporate disclosures in Japan have consistently shown to suffer from poor earnings quality. Drawing from international research and research conducted on Japanese companies, this literature review examines some of the institutional features of Japan which may contribute to the country’s comparatively low earnings quality. Although the review reveals large gaps in the literature, we find that the most likely characteristics driving the poor earnings quality are the disclosures practices of keiretsu affiliates and the underutilization of private or public corporate disclosure enforcement mechanisms. We also examine major reforms stemming from the Enron and Kanebo frauds that have been implemented in Japan in the last decade and discuss their implications for earnings quality.