Stock market listing and real earnings management in a debt-oriented country: Evidence from Japan

Stock market listing can increase firms’ incentives to provide transparent accounting information under “demand” hypothesis, while it can induce managers' incentives to manipulate earnings under “opportunistic behavior” hypothesis. In this regard, prior studies mainly focused on equity-oriented countries and provided mixed results. This study examines the real earnings management of listed and unlisted firms in a debt-oriented country, Japan. We select a sample of 16,704 firm-years (8,352 listed and 8,352 unlisted firm-years) from 2001 to 2021 through propensity score matching. The results indicate that listed firms engage in less real earnings management than unlisted firms. In addition, listed firms with more debt financing engage in more real earnings management, thus suggesting that higher debt dependence weakens incentives for transparent financial reporting. Furthermore, main bank relationships do not affect the gap in real earnings management between listed and unlisted firms, which suggests that the discipline on real earnings management among listed firms stems from capital market monitoring rather than bank monitoring. These findings support the “demand” hypothesis, suggesting that stock market listings increase firms’ incentives to provide investors with transparent financial information. Overall, the findings of this study enhance the understanding of earnings management behavior in a debt-oriented country’s context, contributing to the debate on the myopic managerial behavior of listed firms.