Earnings management to achieve industry-average profitability in Japan

Tomoyasu Yamaguchi

Asia-Pacific Journal of Accounting & Economics, 2022, vol. 29, issue 2, 402-431

Abstract: This study examines earnings management activities to achieve industry-average profitability in Japanese firms. I focus on Japanese firms because they tend to be preoccupied with the activities and profitability of industry competitors. I find that firms just meeting or slightly beating industry-average profitability (JUSTMEET_PEER firms) are positively related to real and accrual-based earnings management. I also find that the positive relationship between JUSTMEET_PEER firms and real earnings management is stronger when the JUSTMEET_PEER firms operate in more competitive industries. Finally, similar evidence is found for firms that just meet and slightly beat industry-average forecast profitability. These findings suggest that Japanese firms tend to regard industry-average profitability as an important benchmark and are likely to engage in earnings management to achieve the benchmark.

Date: 2022
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DOI: 10.1080/16081625.2020.1726188

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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