The Sale of Assets to Manage Earnings in Japan

Abstract

This paper investigates Japanese managers' use of income from the sale of fixed assets and marketable securities to manage earnings. The earnings management target examined in the paper is Japanese managers forecasts of current year and year-ahead earnings. Firms with current performance below (above) previous management forecasts are expected to manage earnings upward (downward) by reporting higher (lower) income from asset sales. In relation to future performance, firms with management forecasts of future periods below (above) current performance are more likely to save (recognize) unrealized holding income on historical cost assets. The results support these expectations. Japanese managers consider both current and future income effects in the recognition of income from asset sales.

Keywords: Asset sales; Earnings management; Management forecasts; Historical cost

JEL Classification: M41, M43