This paper investigates Japanese bank managers' use of the discretionary component of loan loss provisions to manage earnings during the recession of the late 1990s. Although studies of US banks document that bank managers use loan loss provisions to smooth earnings, manage regulatory capital, and signal undervaluation, factors that may affect discretionary loan loss provisions in Japanese banks have not been empirically examined. We find that discretionary loan loss provisions for our sample of Japanese banks are positively related to the demand for external financing, realized securities gains, and prior year taxes and are negatively related to capital and pre-managed earnings.

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During the recent recession (1991 to present), Japanese firms decreased their spending on R&D for the first time since World War II. The decreases have raised concerns that Japanese managers may be making suboptimal allocations to R&D. We test whether Japanese managers adjust R&D based on short‐term performance. Our results show that Japanese firms in several industries adjust their R&D budgets to smooth profits. Interestingly, adjustments to R&D are larger in expansion years. These results, similar to those documented with U.S. managers, point to myopic decision making by Japanese managers.

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Several recent studies have used U.S. analysts' forecasts to test for underreaction or overreaction to information in earnings announcements. These tests have provided mixed results. Evidence in Mendenhall (1991) is that analysts underreact. By contrast. results in D e Bondt and Thaler (1990) show overreaction by U.S. financial analysts to earnings announcements. The current study contributes to this topic by examining over/underreaction by Japanese financial analysts. Test results show that Japanese analysts d o not overreact to earnings announcements, market to book ratios and sales growth. Instead. there is strong evidence that Japanese analysts underreact to earnings announcements and that their underreaction is more pronounced for firms with mostly permanent earnings. Our results also show that Japanese analysts display larger forecast biases for earnings reported under U.S. G A A P as opposed to Japanese GAAP. Finally, we find that U S . analysts discount information in earnings announcements to a larger degree (relying to a greater extent on information in past prices instead) when compared t o their Japanese counterparts. Further, in contrast to their Japanese counterparts, these analysts display no optimistic bias. The results above suggest that the impact of each country's unique culture and capital norms will have to be taken into account by policy makers in evaluating the feasibility of harmonization of accounting standards. VIVEK MANDE and WIKIL KWAK are Assistant Professors, College of Business Administration, University of Nebraska at Omaha.We thank Sandra Chamberlain, Kent Daniel, Richard File, Perry Garsombke, seminar participants at the 1994 AAA meetings and two anonymous referees for their helpful comments. Viveke Mande gratefully acknowledges support from the University Committee on Research.The post-announcement drift (or market underreaction) does not appear to be unique to U.S. stocks. Sakakibari er al. (1988). for example, find evidence of stock price drift for Japanese stocks. This also appears to be true for Australian stocks (see Figure 1 in Brown, 1970). The two studies differed in their testing procedures (see Test Design and Results).Because it is too costly for firms to prepare statements under both local and harmonized GAAP. investors of the local country could also be negatively affected under harmonized GAAP.