Influence of geographic distribution on real activities manipulation within consolidated companies: Evidence from Japan

Abstract

With the globalization of companies, distances between parent companies and their subsidiaries have increased and the locations of subsidiaries have become more diversified. These changes have had various effects on corporate real activities, depending on information asymmetry, transport costs, and the economic environment. We investigate the impact of the geographic distribution of companies on real activities manipulation (RM) within Japanese companies. The results show that (1) as the distance between a parent company and its subsidiaries increases, the subsidiaries’ RM decreases; (2) as the proportion of subsidiaries in Organisation for Economic Cooperation and Development countries increases, the subsidiaries’ RM decreases; and (3) part of the subsidiaries’ RM reduced by geographic distribution is replaced by the parent company’s RM. Additional tests comparing RM with accrual-based manipulation (AM) show that subsidiaries’ AM increases with the distance from the parent company. This result suggests that the parent–subsidiary distance and locations of subsidiaries influence accounting information.