The Impact of Japanese Regulatory Changes on Accrual-Based and Real Earnings Management


The purpose of this study is to investigate the changes in accrual-based earnings management (AEM) and real earnings management (REM) in response to Japanese regulatory changes. After the U.S. Sarbanes-Oxley Act (SOX) in 2002, the Financial Instruments and Exchange Act of 2006 (J-SOX) was introduced in June 2006 in Japan, has been effective since the fiscal year ending on March 31, 2009. We shed light on the time lag between the introduction of SOX and J-SOX as a transition period. During this period, several regulatory bodies addressed the issue of internal control, considering both the SOX and the forthcoming J-SOX. This study, therefore, focuses on the J-SOX and a series of related laws and regulations in this transition period, and their effects on AEM and REM. Our results show that the level of AEM changes during the transition period before the introduction of J-SOX, while that of REM decreases after the introduction of J-SOX. The evidence generally supports the view that J-SOX and the series of regulatory changes before its implementation have an impact on the financial reporting quality of Japanese firms.


Accrual-based earnings management, Real earnings management, Financial instruments and exchange act of Japan

JEL Classification

G38, M41, M42, M48


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

Faculty of Business Administration, Tohoku Gakuin University