Do Japanese Firms Smooth Their Financial Results?

Abstract

ABSTRACT This paper attempts to determine whether Japanese companies “smooth” (i.e., reduce variations in) their financial results. It has three major objectives: (1) to establish a “motive” which explains why Japanese firms might want to “smooth” their financial results, (2) to identify specific techniques or practices which allow Japanese firms to control their reported results, and (3) to demonstrate that the performance of Japanese firms is indeed less volatile than the performance of similar companies in other countries (in this case, the U.S.). But while it is possible to identify both the motives and the means for “smoothing,” and to demonstrate empirically that the returns of Japanese companies are far less volatile than the returns of similar American firms, “smoothing” cannot be established with confidence. An alternative explanation is that the lower volatility of Japanese returns reflects the unique institutional structure of the Japanese economy, the cooperative nature of inter-firm relationships in Japan, and a relatively low level of risk in the Japanese business environment.