Certification of financial reports is tightly regulated with the intent to ensure the quality of this service. In order to place this market within a larger perspective, Part I of this paper presents archival data on certification activity in the economy. The finding of widespread availability of a diverse set of certififiers for most goods and services points to the competitive conditions that accounting firms may encounter as they attempt to expand their range of services. In Part II we examine an instance of audit firms unsuccessfully competing with non-traditional assurance providers of e-commerce privacy certification. Their failure appears to be attributable, at least in part, to the high cost of certification, inferior standards, and poor compliance by their clients. In Part III we document the types of certification reports issued by government agencies and private certification services. Private certification agencies issue more detailed and informative certification reports compared to government agencies. We discuss the implications of these findings for the market for audit services.

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This paper investigates how the information content contained in components of earnings is impounded into stock prices and provides new evidence on market efficiency for firms listed on the Tokyo Stock Exchange First and Second Sections. First, we conduct a conventional pooled Mishkin test to examine whether stocks are rationally priced or not, and claim how this particular test can result in misleading observations if we erroneously pool the data for the overall sample period by completely disregarding the time-series properties of accounting numbers. Next, we conduct time-series analyses on properties of the components of accounting earnings and cast doubt on the forecasting equation used in conventional Mishkin tests. In order to fully investigate the degrees of market efficiency and examine interrelationships between components of accounting earnings, we employ a vector autoregressive approach and propose a new framework to test rational pricing of the accounting information. We find that for 82% of firms listed on the Tokyo Stock Exchange the hypothesis of rational pricing cannot be rejected. This result implies that pooled estimation of the forecasting equation, which disregards the interacting structure among relevant variables, may lead us to incorrect inferences about the degree of informational efficiency in capital markets. The paper further confirms the robustness of our estimation results with some simulations studies.

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This paper aims to clarify a characteristic of the dividend policies of Japanese firms by verifying the dividend life-cycle theory. The analysis revealed that in Japan, growing firms choose further dividend increases compared to mature firms, and that such dividend increases by the growing firms are appreciated by the market more than those by the mature firms. These findings are not consistent with the prediction by the dividend life-cycle theory, but can be interpreted using the concept of corroboration effect.

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The research objective of this paper is to investigate when the adoption of International Financial Reporting Standards (IFRS) is beneficial to capital market participants. In particular, I specify the conditions in which IFRS is superior to domestic accounting standards from cost of capital and disclosure viewpoint. This paper presents a competitive equilibrium model to demonstrate who would prefer IFRS to domestic accounting standards, and when. It shows that in certain conditions, there is a conflict between firms' managers and investors, with regard to the adoption of IFRS. It also demonstrates that although the quality of accounting standards is an important condition, it does not necessitate IFRS preference by managers and investors. This sheds light on the fact that the ratio of foreign investors affects the decision.

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The purpose of this paper is to estimate an alternative implied cost of capital, as inferred from a valuation model, and to attempt to compare its validity. We compare the following major five models: 1) a model proposed by Gebhardt et al. (2001); 2) a model suggested by Ohlson and Juettner-Nauroth (2005); 3) an expected earnings to price ratio (EP ratio); 4) a PEG ratio; and 5) a modifi ed PEG ratio (the last two being proposed by Easton (2004)). For the criteria of valuation in this study, we focused on the following two points: first, a significant correlation with the risk factors consistent with the expected signs and, second, that the coefficients have the expected sign and that the adjusted R-square is high in the multivariate models that regress the cost of capital on the risk factors. As a result, we conclude that the PEG and modified PEG ratios are superior to other models. Furthermore, we suggest that the correlation between the cost of capital and the risk factors varies, depending on the periods. Although Gode and Mohanram (2003) pointed out that the difference in the cost of capital by industry is important, this study shows that the diff erence in the time series of the cost of capital is more important in Japan.

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The leitmotifs underlying accounting standards setting have undergone changes over time, from best practices to a normative approach and then to global convergence. In the process, accounting standards have gradually lost their character as a set of informal social norms based on market practices. This trend, combined with the pursuit of a formal framework not amenable to adjustment through feedback from market tests, has unavoidably brought about a top-down approach. Under this approach, the uniformity of standards from the viewpoint of regulators has been given priority over the usefulness of income information for users of financial statements. Consequently income information, which plays an essential role in the valuation of companies in capital markets, has been affected by a mechanical application of the asset-liability approach and fair value measurement with scant attention to a marked difference in business transactions. Because investors today almost disregard national borders, the homogenization of accounting information is certainly an important goal. To achieve this goal, however, it is necessary to facilitate the spontaneous homogenization of norms based on an evolutionary market process which enables standards setters to incorporate vox populi into accounting standards themselves rather than decide on the direction and degree of convergence on an a priori basis.

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Attempts to improve financial reporting by adding clarity to its rules and standards through issuance of interpretations and guidance also serve to furnish a better roadmap for evasion through financial engineering. Thus, paradoxically, regulation of financial reporting becomes a victim of its own pursuit of clarity. The interplay between rules written to govern preparation and auditing of financial reports on one hand, and financial engineering of securities to manage the appearance of financial reports on the other, played a significant role in the financial crisis of the recent years. Fundamental rethinking about excessive dependence of financial reporting on written rules (to the exclusion of general acceptance and social norms) may be necessary to preserve the integrity of financial reporting in its losing struggle with financial engineering.

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As the first English publication focusing on Japanese accounting research, we believe that one of the long-term goals for this journal is to help build an indigenous research culture that attracts an international audience. In this paper, we provide some thoughts on 1) identifying Japanese settings that may offer unique advantages and merit specific analysis; and 2) the ongoing convergence to International Financial Reporting Standards (IFRS).

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In this commentary I offer some thoughts on the possibilities for accounting research that uses the Japanese setting. I argue that the uniqueness of the Japanese setting offers many opportunities for researchers, and hope that we can encourage more researchers to take advantage of this setting to advance the literature on financial reporting and disclosure.

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