Has Japan Moved Beyond Being a Low-Conservative Country? Reexamining the Evolution of Conditional Conservatism in Japan

Abstract

This study reexamines the "stylized facts" that have been repeatedly confirmed by previous studies on conditional conservatism in Japan. Previous studies find the increase in the degree of conditional conservatism in Japan using Basu's (1997) model (hereinafter, the Basu model). However, recent studies have pointed out significant biases (e.g., CFO asymmetry and cost stickiness) in the measurement results obtained through the Basu model. Therefore, this study reexamines changes in conditional conservatism among Japanese listed firms over time, utilizing an adjusted Basu model (accrual model; Collins et al., 2014). The findings indicate that the level of conditional conservatism among Japanese listed firms is nearly zero during the first half of the sample period (1980s to 1990s); a certain "cyclical" pattern of conditional conservatism is observed in the second half of the sample period (after 2000), with the level of conditional conservatism temporarily increasing sharply before gradually declining to a level close to zero. These results suggest that the previously established stylized facts should be reconsidered. Further analysis indicates that business cycles may partially explain the newly observed pattern of conditional conservatism among Japanese listed firms.

Keywords: Basu model, CFO asymmetry, Cost stickiness, Business cycle, Japan, Conditional conservatism

JEL Classification: M41, M48, G34