The Influence of Informal Institutions on Impaired Asset Write-Offs: Securing Future and Current Pies for Payouts in Japan

Comparative international research on earnings attributes suggests that financial reporting outcomes are partly determined by reporting incentives. Moreover, studies have argued that current-period accounting income tends to be viewed as the pie for stakeholder payouts in countries with stakeholder governance and that, because of the payout preferences of stakeholders, managers tend to reduce income volatility in these countries, either by using their discretion or through real activities. This study focuses on accounting for fixed asset impairment and indirectly investigates the influence of reporting incentives created by an economy’s institutional structures on financial reporting outcomes. It examines whether Japanese firms use discretion and other accounting techniques when recording impaired asset write-offs. It also examines whether these accounting behaviors are different for stable and increased dividend firms and no dividend and decreased dividend firms. Unlike a study using data from US firms, it provides evidence on income-smoothing behaviors, focusing on Japanese firms, and suggests that reporting incentives in the United States and Japan affect write-offs. This study also finds that this is true for stable and increased dividend firms, but is not the case for no dividend and decreased dividend firms. This suggests that the importance of dividends among Japanese firms affects their behaviors.