A Reexamination of Changes in Accounting Policy: Evidence from Japan


This paper reconsiders various hypotheses tested in the literature concerning income smoothing, the big bath, financial distress, debt covenants, management turnover, ownership structure, and auditors. The results show that changes in accounting policy have been carried out for income smoothing. The analysis also indicates a big bath accounting. A higher debt ratio produces more changes in accounting policy, resulting in both income decreases and increases. A higher bank ownership ratio leads to more changes in accounting policy, which decreases income. Banks serve as both shareholders and creditors. Banks’influence as creditors increases when the debt ratio increases. This paper finds that banks influence both income increases and decreases through changes in accounting policy. The evidence also shows that management turnover promotes income increases through changes in accounting policy, while an audit by a Big N firm effectively restrains accounting policy changes that increase income. I find that management changed its accounting policy depending on circumstances, even when the changes were clear from the disclosures and could be seen as earnings management.


Change in Accounting Policy, Earnings management

JEL Classification



Masahiro ENOMOTO
Research Institute for Economics and Business Administration,
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059