The Choice of Accounting Policy In Japan

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Abstract
The purpose of this study is to investigate factors which potentially influence Japanese managers' choices of accounting policies. Several factors have been posed to affect the choice of accounting policy of U.S. managers (e.g., Watts and Zimmerman's (1986) positive accounting theory). However, the general business characteristics of the U.S. environment differ, sometimes drastically, from those in Japan. Factors affecting the choice of accounting policy in the U.S. may not similarly affect the choice of accounting policy in Japan. At the same time, new factors may be identified in the Japanese business environment.Income strategy models are developed for each firm according to the type (income increasing or income decreasing) of accounting policies employed. The results suggest that both the size and debt/equity hypotheses are significant, even for keiretsu firms. These results are surprising given (1) the close relationship between firms and the government, (2) regulations of the commercial code which serve to protect the interests of debtholders, and (3) the tight relationship between banks and firms within keiretsu groups which protects firms from bankruptcy and takeover. Variables representing firms' effective tax rate, ability to finance operations internally, and foreign political costs are also shown to significantly affect Japanese managers' choices of accounting policy. The bonus hypothesis is not significant in the Japanese environment. Furthermore, the choice of accounting policy is explained more by individual firm characteristics than by keiretsu membership or industry membership.

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