Managing Earnings Surprises in Japan: Perspectives from Main Bank Relationships and Institutional Ownership

Authors

  • Bok Baik,

    1. The authors are respectively from Seoul National University and Korea University Business School. They are grateful for helpful comments and suggestions from an anonymous referee, Andrew Stark (editor), Jong-Hag Choi, Bjorn Jorgensen, and seminar participants at the American Accounting Association 2008 Annual Meeting, the Korean Accounting Association 2008 Annual Meeting, and Korea University. Bok Baik acknowledges financial support from the Korea Research Foundation (250-20080033). Wooseok Choi acknowledges financial support provided by Korea University.
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  • Wooseok Choi

    Corresponding author
    1. The authors are respectively from Seoul National University and Korea University Business School. They are grateful for helpful comments and suggestions from an anonymous referee, Andrew Stark (editor), Jong-Hag Choi, Bjorn Jorgensen, and seminar participants at the American Accounting Association 2008 Annual Meeting, the Korean Accounting Association 2008 Annual Meeting, and Korea University. Bok Baik acknowledges financial support from the Korea Research Foundation (250-20080033). Wooseok Choi acknowledges financial support provided by Korea University.
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Address for correspondence: Wooseok Choi, Korea University Business School, Anam-Dong, Seongbuk-Gu, Seoul, Korea 136-701.
e-mail: choiw@korea.ac.kr

Abstract

Abstract:  In this study, we examine the impact of main bank relationships and institutional ownership on management's incentives to meet or beat analysts’ expectations in Japan. We hypothesize that close main bank relationships reduce managers’ incentives to meet or beat analysts’ expectations since investors place less weight on the need to achieve capital market-based performance benchmarks. Consistent with our prediction, we find that firms with close main bank relationships are less likely to meet or beat analysts’ expectations. In contrast, we find that the incidence of meeting or beating analysts’ consensus forecasts is greater for firms with institutional shareholders, suggesting that such investors place greater importance on achieving capital market–based performance benchmarks. Overall, our findings support the notion that banks and institutional investors play a significant role in firms’ financial reporting behavior.

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