IFRS Adoption and Accounting Conservatism of Japanese Firms with Governance System Transition

Abstract

This study examines whether there is a difference in the degree of accounting conservatism between firms that voluntarily adopt International Financial Reporting Standards (IFRS) and those that use local accounting standards in Japan, being a traditional code-law country that is undergoing changes in its governance system. The difference-in-difference approach reveals that the degree of conditional conservatism decreases for IFRS adopters and more sharply for Japanese accounting standards’ users between 2009/2010 and 2018/2019, resulting in relatively larger conditional conservatism for IFRS adopters. The regression analysis shows that the change in conditional conservatism is positively associated with IFRS adopters having a high foreign shareholders ratio. This study makes several contributions to the related literature. First, to the best of our knowledge, this study is the first to provide a comparative analysis of IFRS and Japanese accounting standards with respect to conservatism. Second, additional evidence is provided on the relationship between conservatism and corporate governance.