Earnings Management in J-REIT

Abstract

The Japan Real Estate Investment Trust (J-REIT) is practically exempt from corporate taxation as it satisfies certain conditions under the Act on Special Measures Concerning Taxation. For J-REIT to receive this preferential treatment, it is necessary to satisfy the conduit requirements that it distributes 90% of its taxable income as dividends to common shareholders. In addition, because J-REIT has a high proportion of depreciable tangible fixed assets owing to the nature of its business, the depreciation expenses have a significant impact on its income. Given such characteristics of J-REITs, I investigate the factors influencing earnings management through an adjustment of the depreciation expenses of J-REITs. Using a sample of J-REITs for the period 2005–2017, I find that (1) income-increasing earnings management through the management of depreciation expenses is implemented as the share of non-individual shareholders increases and the influence of creditors increases and (2) income-decreasing earnings management through the management of depreciation expenses is implemented as the investment opportunity sets and the corporation's size increases.