Disclosures of material weaknesses by Japanese firms after the passage of the 2006 Financial Instruments and Exchange Law

Anna Chernobay, Yukihiro Yasuda

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

We investigate the disclosures of material weaknesses in internal control mandated for Japanese firms under the 2006 Financial Instruments and Exchange Law. We find that the presence of a material weakness is more likely for firms that are younger, have better growth prospects, have a volatile operating environment, are financially constrained, and have weak governance structures. We examine the role of Japan's main banks in this process and find that the likelihood of a material weakness is higher for firms with stronger links with their main banks. We also show that the financial health of the main banks themselves-proxied for by the banks' BIS ratios and bad loan ratios-increases the likelihood of a material weakness in affiliated firms. This paper provides novel insights into the determinants of material weaknesses of Japanese firms since the passage of the law. Results from this study contribute to the literature on material weaknesses and relationship banking.

Original languageEnglish (US)
Pages (from-to)1524-1542
Number of pages19
JournalJournal of Banking and Finance
Volume37
Issue number5
DOIs
StatePublished - May 2013

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Material weakness
Japanese firms
Financial instruments
Disclosure
Main bank
Governance structure
Relationship banking
Internal control
Japan
Loans
Financial health

Keywords

  • Financial Instruments and Exchange Law
  • Japan's main banking system
  • Material weakness
  • Relationship banking

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Disclosures of material weaknesses by Japanese firms after the passage of the 2006 Financial Instruments and Exchange Law. / Chernobay, Anna; Yasuda, Yukihiro.

In: Journal of Banking and Finance, Vol. 37, No. 5, 05.2013, p. 1524-1542.

Research output: Contribution to journalArticle

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