We examine the effect of managerial ownership on the demand for accounting conservatism in Japan. We find that within the low and high levels of managerial ownership, managerial ownership is significantly negatively related to the asymmetric timeliness of earnings, which is consistent with the implication of the incentive alignment effect. We also find a significant positive relationship between managerial ownership and the asymmetric timeliness of earnings for the intermediate levels of managerial ownership, as suggested by the management entrenchment effect. These evidences suggest the possibility that accounting conservatism contributes to addressing the agency problem between managers and shareholders. Copyright (c) 2010 Blackwell Publishing Ltd.

ABSTRACT:We study events surrounding ChuoAoyama's failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC's Japanese affiliate and one of Japan's largest audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama's reputation. We use these events to provide evidence on the importance of auditors' reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama's clients defected from the firm after its suspension, consistent with the importance of reputation. Larger firms and those with greater growth options were more likely to leave, also consistent with the reputation argument.

SummaryThe state of vitamin B12-deficiency in rats was evaluated by determination of hepatic vitamin B12-dependent enzyme activities after the animals had fed on a vitamin B12-deficient soybean protein diet for 150 days. The effect of vitamin B12-deficiency on testicular tissue was also studied by morphological observations. Growth of vitamin B12-deficient rats was retarded and marked increase in urinary methylmalonic acid was observed. Vitamin B12 contents in the organs were depressed distinctly by the deficiency, especially in testes, vitamin B12 content decreased to 2.5 ng/g. Hepatic methionine synthase and methylmalonyl-CoA mutase ac tivities showed striking depression to 5% of the control rats and extreme vitamin B12-deficiency was confirmed. Testes weight also showed marked decrease together with their relative weight per 100g body weight. Mor phological observations of testes of vitamin B12-deficient rats revealed atrophy of the seminiferous tubules and aplasia of sperms and spermatids. The above results proved that vitamin B12-deficiency affected rat testes, and suggested that the rat could be the animal model for elucidation of the mechanism of B12 action on testicular functions.

Research Question/Issue: This study investigates the effect of cross-shareholding on financial reporting and the information environment in the Japanese market and hypothesizes that higher cross-shareholding is related to lower contract-efficient earnings recognition and higher information asymmetry because cross-shareholding entrenches managers. Furthermore, we investigate whether managers try to maximize their self-interest or to enjoy a quiet life when they are isolated from market pressure and entrenched owing to cross-shareholding. Research Findings/Insights: Using a unique dataset on cross-shareholding among Japanese listed firms, we find that higher cross-shareholding is associated with (1) less timely loss recognition and (2) higher probability of information-based trading. Further investigation clarifies that higher cross-shareholdings are related to (3) lower absolute forecast error and (4) lower R&D expenditures. The first two findings indicate that cross-shareholding entrenches managers, and the last two findings show that entrenched managers enjoy a quiet life. Theoretical/Academic Implications: This study contributes to the corporate governance literature by providing new evidence that cross-shareholding influences financial reporting and the information environment in the market by inducing managers to become entrenched and to enjoy a quiet life. Practitioner/Policy Implications: This study provides implications for policymakers in markets in which cross-shareholding is a common ownership format. To enhance contract-efficient financial reporting and/or reduce information asymmetry in the market, it may be necessary to reduce cross-shareholding.

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