Extrinsic shocks and corporate accounting behaviour: The case of the Great Kanto Earthquake in 1923

Abstract

This study examines how the Great Kanto Earthquake of 1923 influenced the depreciation disclosure practice adopted by Japanese companies in the years that followed. Prior to World War II, corporate accounting behaviour varied widely in Japan, as there were few substantive rules regulating the contents of financial statements. Assessing how a large-scale extrinsic shock such as a major earthquake affects and shapes corporate accounting practices in an unregulated disclosure environment such as this would seem important to understand the intrinsic impact of exogenous shocks. By statistically analysing the contents of 547 financial statements issued by 51 machinery, electrical and transportation equipment manufacturers during the six years from 1921 to 1926, this study shows that the substantial damage inflicted by the Great Kanto Earthquake discouraged companies from disclosing depreciation expenses by reducing or failing to recognise them at all and rendering them less important in their financial statements.