The Internationalization and Voluntary Adoption of International Accounting Standards by Japanese MNEs.
| Verfasser | Sakawa, Hideaki |
| Posten | RESEARCH ARTICLE - Multinational enterprises |
1 Introduction
Internationalization is an important factor for the analysis of international convergence in academic research (Aguilera & Jackson, 2003). International Financial Reporting Standards (IFRS) have been adopted by many countries, as they are regarded as the set of international global standards that enhance the comparability of financial reporting (Barth et al., 2012; Doupnik & Perera, 2012; Doupnik & Riccio, 2006). In European countries, mandatory IFRS adoption was implemented in 2005. Despite the importance of the issue, there is a lack of theoretical studies on IFRS adoption (Hope, 2003).
The corporate governance literature tends to assume that national institutional factors explain firm-level corporate governance practices (Aguilera & Jackson, 2003; La Porta et al., 2000). In fact, national-level IFRS adoption depends on different levels of institutional backgrounds (Judge et al., 2010). Therefore, the adoption of accounting standards has been analyzed for only a limited number of countries (Ball et al., 2003) and generally has not focused on countries with voluntary IFRS adoption (Hope et al., 2006). This study aims to fill this research gap by studying voluntary IFRS adoption in Japan.
This study aims to clarify the logic of adoption choice by Japanese multinational enterprises (MNEs) of IFRS or US Generally Accepted Accounting Principles (US GAAP). MNEs tend to face different corporate governance practices across the countries in which they are engaged (Kostova et al., 2008). In the process of internationalization, domestic firms have to attract foreign shareholders that possess different national corporate governance logics (Aguilera et al., 2018). As a result, at the firm level, MNEs may intentionally deviate from the standard set of corporate governance logics (Aguilera et al., 2018). As the global competition for capital has reached record proportions, nations are willing to replace their domestic standards with international standards, like IFRS or US GAAP.
Most developed countries except the United States have adopted IFRS, but Japanese firms have been given the choice of adopting either IFRS or US GAAP since March 2010. One reason for this difference may be due to political conflicts related to mandatory IFRS adoption in Japan in the future (Tsunogaya et al., 2015). The other reason is that some Japanese MNEs, like Toyota, tend to adopt US GAAP for capital acquisition in US financial markets. In addition, some MNEs have region-specific scope and place greater weight on stakeholders in the North American region. Thus, Japanese MNEs' decision to adopt IFRS or US GAAP may be affected by their stakeholders, like foreign shareholders, or their foreign subsidiaries.
In this study, we analyze the determinants of voluntary adoption of IFRS or US GAAP in Japanese MNEs. Japan is known for stakeholder-oriented corporate governance logic in which goal of the firm is to balance interests among all of the firm's stakeholders (Jackson, 2005). Stakeholder-oriented corporate governance logic may affect managerial discretion related to the voluntary adoption of accounting standards. In fact, MNEs may care about the stakeholders in their internationalized location under stakeholder-oriented corporate governance.
Using data of Japanese MNEs from 2010 to 2017, we identify the following relationships between the degree of internationalization and voluntary adoption of IFRS or US GAAP. Our empirical findings are summarized as follows. First, voluntary IFRS and US GAAP adoption is higher in firms with a higher internationalization degree. Second, foreign shareholders favor voluntary adoption of US GAAP in Japanese MNEs. Under stakeholder-oriented corporate governance, foreign shareholders have shareholder-oriented logics (Desender et al., 2016; Sakawa & Watanabel, 2020b). Thus, foreign shareholders stress the compatibility of financial reporting in Japanese MNEs. Under a US region-specific approach of Japanese MNEs, voluntary adoption of US GAAP is expected to enhance the compatibility of financial reporting that is aligned with the interests of foreign shareholders.
The theoretical contributions of our study are summarized as follows. First, our study examines the firm-level intentional deviation from the standard set of corporate governance logics in the international corporate governance literature (Aguilera et al., 2018). From the corporate governance deviation perspectives (Aguilera et al., 2018), firm-level intentional deviation from the Japanese domestic accounting system may occur in MNEs with a higher internationalization degree. Second, we aim to reveal how foreign shareholders pressurize Japanese MNEs to adopt either US GAAP or IFRS from a semiglobalization perspective (Arregle et al., 2013). Under a US region-specific approach of Japanese MNEs, the compatibility of financial reporting is higher for MNEs adopting US GAAP than for those adopting IFRS. Under stakeholder-oriented corporate governance, foreign shareholders have shareholder-oriented logics (Desender et al., 2016). Therefore, greater presence of foreign shareholders pressurizes Japanese MNEs to adopt US GAAP to enhance the compatibility of financial reporting in MNEs.
The rest of this paper is organized as follows. Section 2 presents our theoretical development and empirical hypotheses. In Sect. 3, we explain our sample and methodology. Section 4 presents the data analysis and empirical results. We discuss our results in Sect. 5. Finally, we conclude in Sect. 6.
2 Theory and Hypothesis Development
2.1 Theoretical Background
The globalization of market forces has progressed to push the corporate governance practices of non-Anglo-American countries toward a model of shareholder-oriented corporate governance (Ahmadjian & Robbins, 2005; Seki, 2005; Yoshikawa & Gedajlovic, 2002). Traditional corporate governance models in these countries are widely diversified (Guillen, 2000). One reason for this diversification is that the degree of external pressures is different across countries. The other reason is that each national institutional environment may vary in the extent to which it is based on corporate governance practices (Aoki, 2001). These previous studies suggest that changes in corporate governance depend on external and internal forces as well as the interactions among internal forces. Thus, institutional contexts are important for determining the practice of corporate governance change.
Previous literature seeks to explain why and how a corporation tends to adopt corporate governance practice based on corporate governance logic. From the institutional theory perspective, it is important to analyze how macro social institutions influence and shape lower level social activities and organizational behavior (Scott, 2001). The institutional environment guides or constrains legitimacy seeking (Aguilera & Jackson, 2003). Since accounting information is viewed as legitimate information to be trusted by its users, it is possible that institutional theory is a useful framework for predicting the adoption of new accounting standards, such as IFRS (Ball et al., 2003).
Our study aims to investigate the voluntary adoption of accounting standards in stakeholder-oriented corporate governance from the corporate governance deviation perspective advocated by Aguilera et al. (2018). The governance deviation perspective integrates national-level forces and firm-level socio-cognitive agent behavior to draw on institutional theory. Aguilera et al. (2018) suggest that a firm's intentional deviation from a standard is influenced by legitimate practices and normative expectations are prompted by dominant national governance logic.
2.2 Research Context
We seek to understand why and how nation-state institutional logics strongly affect the adoption of new accounting standards. The domestic accounting standards of most industrialized countries have been developed over time. As global competition has progressed, nations have become willing to exchange their domestic standards for more commonly used sets of standards (e.g., IFRS and US GAAP). Emerging economies have tended to adopt IFRS since the mandatory adoption of IFRS in Europe in 2005. This is because the quality of IFRS is superior to the quality of these countries' domestic accounting standards. However, the tendency of earnings management in EU countries has continued in the post-IFRS period (Gray et al., 2015). Meanwhile, in Asian Pacific countries, the adoption of IFRS is associated with a reduced level of earnings management (Wijayana & Gray, 2019). These results suggest that nation-state institutional logics matter for the effect on international accounting standards.
The Japanese setting is a unique country-level institutionalized logic involving the voluntary adoption of IFRS or US GAAP. Mandatory adoption of IFRS is not required in Japan or the US. Developed countries whose domestic accounting standards are perceived as high quality may face difficulty in the mandatory adoption of IFRS. In Japan, the Business Accounting Council decided to implement voluntary adoption of IFRS after March 2010 for the consolidated financial statements of listed companies. Since then, Japanese firms have been able to choose to adopt domestic GAAP or another set of accounting standards, such as IFRS or US GAAP. Therefore, Japanese firms face managerial discretion, such as the voluntary adoption of either IFRS or US GAAP.
Stakeholder-oriented corporate governance logics may affect managerial discretion related to the voluntary adoption of accounting standards. Under stakeholder-oriented governance logic, the goal of the firm is to balance interests among all stakeholders in the firm (Jackson, 2005). Japan is known for its stakeholder-oriented corporate governance (Desender et al., 2016; Sakawa & Watanabel, 2019; Yoshiraori, 1995). As Tsunogaya et al. (2015) argue, practitioners insist on a cautious...
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