UNREALIZED GAINS AND LOSSES OF SECURITIES, ABNORMAL RETURN AND RISK SHARING AMONG BUSINESS PARTNER FIRMS

We investigate the usefulness of fair-value accounting of investment securities in Japanese firms. In Japan, firms tend to hold shares of business partner firms to stabilize business relationships and to share risk. One implication of this partnership structure is that unrealized gains and losses of securities (URGS) in a Japanese firm may reflect the risk incurred by its business partners. We use a four-factor model to investigate the relation between URGS and abnormal returns. The results of our analyses show a positive correlation between URGS and abnormal returns.