AN EMPIRICAL STUDY OF EARNINGS MANAGEMENT UNDER THE INTERNAL CONTROL RULE IN JAPAN

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This study examines earnings management in Japan. We show kinky distribution of corporate earnings suggesting manipulation to avoid reporting losses. We find a large rate of reduction in forecasts errors in the last quarter of the fiscal year. Tazawa's sophisticated model for inventory estimation detects evidence consistent with potential accounting manipulation of "lower of cost or market" to avoid reporting losses. This study reveals evidence suggesting income smoothing behavior through inventories in Japanese automobile industry. We finally examine explicit manipulation using special profit, such as gain trading, for compensating big special losses.