Does Non-Discretionary Conservatism Really Exist? -- Evidence and Implications from Japanese Listed Companies

Abstract

This study extends several discussions regarding non-discretionary conservatism and documents evidence of non-discretionary conservatism in Japanese listed companies. Moreover, it finds that managerial opportunism cannot be completely ruled out even when asset write-downs are strongly warranted by circumstances. The findings of this study suggest that the current Japanese accounting regime for fixed assets’ impairment is likely to create an environment where management undertakes a more aggressive approach to earnings, specifically regarding the practice of recognizing asset write-downs, than their counterparts in the USA. The main implication of this study is that unconditional conservatism immunizes managerial opportunism that can arise from the subjectivity found in conditionally conservative accounting. Results of the quantile regression (QR) and least absolute shrinkage selection operator (LASSO) also indicate that current accounting standards, on their own, are inadequate to produce high quality accounting.