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The Sale of Assets to Manage Earnings in Japan

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  • Don Herrmann
  • Tatsuo Inoue
  • Wayne B. Thomas

Abstract

In this article we investigate Japanese managers’ use of income from the sale of fixed assets and marketable securities to manage earnings. The earnings management target examined is Japanese managers’ forecasts of current–year earnings. We find a negative relation between income from asset sales and management forecast error. When current reported operating income is below (above) management's forecast of operating income, firms increase (decrease) earnings through the sale of fixed assets and marketable securities. The results hold after controlling for expected future performance, debt–to–equity ratio, size, growth, and last year's income from asset sales.

Suggested Citation

  • Don Herrmann & Tatsuo Inoue & Wayne B. Thomas, 2003. "The Sale of Assets to Manage Earnings in Japan," Journal of Accounting Research, Wiley Blackwell, vol. 41(1), pages 89-108, March.
    • Handle: RePEc:bla:joares:v:41:y:2003:i:1:p:89-108
    DOI: 10.1111/1475-679X.00097
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    References listed on IDEAS

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    1. Ervin L. Black & Keith F. Sellers & Tracy S. Manly, 1998. "Earnings Management Using Asset Sales: An International Study of Countries Allowing Noncurrent Asset Revaluation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(9-10), pages 1287-1317.
    2. Aboody, David & Barth, Mary E. & Kasznik, Ron, 1999. "Revaluations of fixed assets and future firm performance: Evidence from the UK1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 149-178, January.
    3. Conroy, Robert & Harris, Robert S. & Park, Young S., 1993. "Published analysts' earnings forecasts in Japan: how accurate are they?," Pacific-Basin Finance Journal, Elsevier, vol. 1(2), pages 127-137, May.
    4. Ervin L. Black & Keith F. Sellers & Tracy S. Manly, 1998. "Earnings Management Using Asset Sales: An International Study of Countries Allowing Noncurrent Asset Revaluation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(9‐10), pages 1287-1317, November.
    5. Darrough, Masako N. & Pourjalali, Hamid & Saudagaran, Shahrokh, 1998. "Earnings management in Japanese companies," The International Journal of Accounting, Elsevier, vol. 33(3), pages 313-334.
    6. DeFond, Mark L. & Park, Chul W., 1997. "Smoothing income in anticipation of future earnings," Journal of Accounting and Economics, Elsevier, vol. 23(2), pages 115-139, July.
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