An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Don Herrmann
Oklahoma State University

Wayne B. Thomas
University of Oklahoma

Tatsuo Inoue
Kwansei Gakuin University

Abstract: Our broad research objective is to investigate whether convergence towards international standards improves the decision usefulness of information. Recent changes in Japanese consolidated reporting practices to better align with international standards provide an excellent setting to investigate this research objective. Specifically, we examine the effect of changes in Japanese consolidation policy on financial analysts’ perceptions of the persistence of subsidiary earnings. Consistent with prior research using stock returns, we find that financial analysts also underestimate the persistence of subsidiary earnings in Japan. However, following the changes in consolidation policy in Japan, we find that financial analysts no longer underestimate the persistence of subsidiary earnings. Changes in Japanese consolidation policy in conformance with international standards increase decision usefulness by improving the ability of financial analysts to predict overall firm performance.

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