The impact of institutional characteristics on return-earnings associations in Japan

In this paper, we report the result of investigation into the impact of institutional characteristics on return-earnings associations in Japan. It is found that the strength of return-earnings associations in Japan is inversely affected by the extent to which a firm's shares are cross-held, the degree of a firm's holding of real estate assets relative to other assets, the amount of a firm's investment in equities of other firms, and the degree of a firm's reliance on debt financing, while it is positively affected by the extent to which a firm's shares are owned by foreign investors. We also provide evidence suggesting that reported earnings are less value-relevant in Japan than in the US, and that the pervasive use of conservative accounting practices in Japan is well manifested in the return-earnings association. Collectively, our results indicate that future research on cross-national differences in the value relevance of accounting disclosures must pay more attention to institutional environments unique to countries concerned. Copyright © 1999 University of Illinois.