Empirical Analysis on the Earnings Quality of Japanese SMEs (Japanese)

The purpose of this paper is to empirically examine the earnings quality of Japanese small and medium-sized enterprises (SMEs). More concretely speaking, we investigate the current properties of earnings quality including earning persistence, earnings benchmarks, and accruals by using data on Japanese SMEs and listed companies from FY2006 to FY2013. We find that, first, earnings persistence of SMEs is relatively lower than that of listed companies. For example, only 55% of future operating income can be predicted by the current operating income in the case of SMEs, while about 70% can be explained for the listed companies. Second, a "kink" in the distribution of reported earnings around zero is observed for SMEs, which is similar to the case of listed companies. finally, accruals quality is generally lower for SMEs regardless of the choice of accrual model, indicating that earnings quality as measured by accruals is lower for SMEs compared with the listed companies. Overall, from the viewpoint of earnings quality, our empirical evidence supports the direction of the reform comprised as a new document presenting guidelines for SME accounting ( Chusho Kaikei Yoryo ).