Corporate governance in Japan in the 1930s and its impact on financial reporting practice

Japan’s financial reporting system during the 1930s is an essential analytical subject as it provides an indispensable opportunity for scholars to identify the determinants of financial reporting practice adopted in an unregulated disclosure setting. This study examines the claim that the number of items disclosed in the income statement produced by Japanese heavy chemical companies during this period was materially affected by the period’s national economic policy put in place to rationalise the sector through business combinations. To test this proposition, we conduct an ordered logit analysis using 1651 panel data sets consisting of income statements issued by 104 industrial companies available from the Integrated Database of Corporate Historical Materials provided by the Japan Digital Archives Center (J-DAC). Our evidence suggests the possibility that an inherent motivation existed on the part of the owner-managers in the heavy chemical industry to withhold performance information from the public as a consequence of the business combination movement promoted by the National Industrial Rationalization initiative. One possible explanation is the desire of the corporate managers to protect their dominant position from hostile takeovers by providing less-transparent information and thus amplifying the uncertainty associated with acquisitions.