The Economic Recession in 2008 and Corporate Accounting

This paper investigates on the effects of economic recession in 2008 after the "financial crisis" with Firm - Level Data (non-financial sector) from the "Corporate Enterprise Annually Statistics" from 1994 to 2008. The purpose of this research is to investigate the impact of the shock on the firms' earnings and their adoptive accounting behavior. Four major findings of this paper are as follows. First, the recession in 2008 caused to the decline of firms' operating revenues and operating earnings. Moreover, the valuation losses of holding securities hit against their poor business performance. However, financing activities were not the point at the issue for most firms. Originally, not financial, but business performance of loss reporting firms in 2008 was lower than the other firms. Because "winners" disappeared in 2008, the performance of Japanese firms so seriously declined on the whole. Second, the persistence of earnings greatly dropped in 2008, because the more firms reported losses and the more firms experienced the earnings decrease. I detect the evidence that, under controlling the change of earnings signs between profits and losses, the persistence of earnings is declining during 15 years. Third, though the accounting standards for the financial instruments and for the impairments of fixed assets gave an effect on the "cherry-picking" sales behavior of the investments, i.e. financial assets and holding securities, I find that "cherry-picking" sales still remain. By "cherry-picking", big companies smoothed the net income when earnings before tax, special and extraordinary items were relatively lower. However, they abandoned the income smoothing in 2008, in the face of the rapid and great decline of performance. Fourth, the time series behavior of earnings components, the persistence of earnings, and income smoothing behavior are different among the capital size classes. All of those varieties would not necessarily be brought by the actual and real differences in corporate management. The fact that we don't know the accounting standards, which are used in the middle and small capital size firms, is a new and very important problem for "Corporate Enterprise Statistics", collecting the data of financial statements from firms belong to the various capital classes and combining those data without modification.