Do management forecasts of earnings affect stock prices in Japan?

Trevor S. Harris · Masako N. Darrough

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

One of the major differences that has attracted a great deal of attention is the relatively high average price/earnings (PE) ratio for the stocks listed on the Tokyo Stock Exchange. A question sometimes raised in the popular press is whether the difference in PEs suggests that US stocks are undervalued or Japanese stocks are overvalued.1 Of course, such conjectures are not well-founded unless we understand the differences in the institutional characteristics of the two markets. Some of the differences raise subtle but important questions, such as whether a particular institutional arrangement can be adopted in other environments. Just as we have seen the transfer of US accounting practices to non-US companies active in international capital markets, certain institutional characteristics of Japan's capital markets might lead to related changes in other countries. This paper considers one such characteristic, management forecasts, which we believe to be a likely candidate for such a global transfer.

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References

1968The Information Content of Annual Earnings Announcements 1987On cross-sectional analysis in accounting research 1987Security analyst superiority relative to univariate time-series models in forecasting quarterly earnings 1980An Empirical Investigation of the Voluntary Disclosure of Corporate Earnings Forecasts 1987An evaluation of alternative proxies for the market's assessment of unexpected earnings 1984Additional Evidence on the Information Content of Management Earnings Forecasts 1985Security Analyst Multi-Year Earnings Forecasts and the Capital Market 1990Were Japanese Stock Prices Too High?

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