Using a large sample of Japanese firms, this paper examines the impact of the ownership structure on managerial incentives for income smoothing through discretionary accrual choices. Our results show that like US managers, Japanese managers engage in income smoothing in consideration of both current earnings and expected future earnings. More importantly, we find that managers' ability to smooth income through discretionary accrual choices is constrained by external monitoring by financial institutions, while it is enhanced by managerial entrenchment arising from cross-corporate shareholdings.
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