Economic Consequences of Fair Value Accounting and a Change in the Distribution Rule

This research examines the economic consequences of fair value accounting and a change in the distribution rule. In Japan, fair value accounting for financial instruments was mandated from 2001, and unrealized revaluation profits were to be included in income statements. As an institutional correspondence to the change in accounting standards, Japanese Commerce Law implemented the deduction of revaluation profits from distributable profits. However, from 2006, the Japanese Company Act changed its distribution rule to include revaluation profits in distributable profits. Utilizing such a unique institutional setting, I investigated whether fair value adjustments are related to dividends and whether the change in the distribution rule had an impact on companies' dividend policies. The results show that the change in the distribution rule influenced companies' dividend policies, especially Japanese firms, as they tend to pay out revaluation profits as allowed by the Company Act.