| Summary |
The firm-year-level accounting conservatism measure known as C_Score, developed by Khan and Watts (2009), is frequently used in accounting research internationally. However, Khan and Watts themselves note that that, as the measure was developed for the U.S., it may not be an appropriate measure for other countries. This study investigates the validity of C_Score in the Japanese context, where the institutional features are substantially different from those in the U.S. We begin by replicating the tests used by Khan and Watts and find that C_Score of Japanese data appears to be consistent with that of the U.S. However, additional evidence suggests that the use of C_Score in Japan is not necessarily appropriate. Specifically, we conduct three additional tests. First, in many years during our sample period, the coefficients of C_Score are not statistically significant, and their signs are different from their predictions. Second, we investigate the extent to which each factor—namely firm size, market-to-book ratio, and leverage—determines C_Score and find that the relationships between C_Score and these three factors are not stable and vary over time; furthermore, firm size is the sole determinant of C_Score for many investigated years. Finally, we examine the association between C_Score and asset impairment losses, which are conditionally conservative accruals, and find no positive association—contrary to prior research findings regarding U.S. goodwill impairments. Overall, our findings suggest that C_Score is not valid for measuring firm-year-level accounting conservatism for Japanese listed firms. |
