RIEB Discussion Paper Series No.2017-06

Title

Strategic Management Forecasts and Accounting Choices: A Case of Employee Downsizing in Japan

Abstract

Prior research shows that managers make income-decreasing accounting choices around labor negotiations and predicts that managers disclose bad news during labor negotiations. This study extends the literature by investigating whether disclosure and financial statements reporting practices are consistent during employee downsizing years. Using data from Japanese domestic firms during the period 2002-2016, we find that beginning-of-period management forecasts (i.e., disclosure) are positively associated with during-period negative stock returns for downsizing firms but not for non-downsizing firms. Also, downsizing firms report more conservative earnings at the end of the fiscal years (i.e., financial statements reporting). Our supplementary analyses show no difference in an association between management forecast errors and stock returns between downsizing and non-downsizing firms with during-period negative stock returns, nor in an association between discretionary accruals and employee downsizing. These results suggest that managers strategically inform firms' prospects during employee downsizing years.

Keywords

Accounting conservatism, Management forecast, Employee downsizing, Labor negotiation

JEL Classification

G34, J51, M41

Inquiries

Keishi FUJIYAMA
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

Makoto KUROKI
Graduate School of International Management, Yokohama City University