Earnings quality in international settings: a comparative study of Japan, Thailand and the U.S.A

The purpose of this study is to investigate how the quality of earnings, vis a vis, the quality of accounting, is related to the idiosyncrasies of specific country settings. We focus our study on pre- and post-Asian financial crisis (AFC) Japan, pre-AFC Thailand and pre- and post-2000-01 recession USA. Japan has a legacy of keiretsu form of interrelated firms and debt financing by keiretsu banks. Thailands companies are predominantly family controlled with their accounting being influenced by tax laws. More specifically, pre-AFC Thailand had a weak accounting institutional setting with laws that favored insiders and a prevalence of short-term debt financing with a large overseas involvement. The US has a classic Bearle and Means setting with fairly clear demarcations between the interests of equity providers, creditors and managers. We observe that in Japan income enhancing discretionary accruals were positively associated with both long-term and short-term financing after the AFC, a period of time when Japanese companies faced challenging circumstances with respect to profitability and several Japanese banks came under the spotlight of international institutions for excessive non-performing loans. We conclude that because of the keiretsu associations between the firms and banks, in difficult times, Japanese banks allow firms to use discretionary accruals for reporting higher earnings. For pre-AFC Thailand, earnings increasing discretionary accruals were positively associated with short-term financing, indicating that earnings were managed to attract short-term debt. For the US, the results support the theory that debt mitigates agency problems by ensuring reporting of better quality earnings. We conclude that the quality of earnings varies among countries depending on financing and corporate arrangements.