Tokyo-based Olympus Corporation, founded in 1919, manufactures digital cameras and
electronic equipment, including medical imaging equipment. Sales for the 2011 fiscal year were
$10.6 billion. Olympus shares are traded on the Tokyo Stock Exchange and its American
Depository Receipts are traded on the U.S. over-the-counter market (i.e., the “Pink Sheets”).
According to Reuters, the market value of the company’s shares dropped by 76 percent
between October 14, 2011 and November 9, 2011, wiping out more than $6 billion for
shareholders (Stempel and Cruise 2011). The event that triggered the decline in stock price took
place on October 14, 2011, when the company fired its CEO, Michael Woodford, two weeks
after his appointment.
As background for this case, the Japanese economy enjoyed tremendous prosperity
during the 1980s. One indicator of this prosperity, the Nikkei 225 index, rose from less than
6,000 in January of 1980 to a peak of 38,915 at the end of December 1989—an increase of 550
percent over ten years. But Japan’s success also caused the yen to rise during this period. In
January 1985, the exchange rate of yen per dollar was approximately 254. By December 1989,
that rate had dropped by 43.7 percent to 143. The rising yen increased pressure on the operating
profits of Japanese companies, which relied heavily on exports.
In this environment, Olympus began to increasingly rely on investment income as part of
its business strategy. Unfortunately for Olympus, the Japanese equities market saw a precipitous
decline in the 1990s. The Nikkei 225 index had lost over 50 percent of its value by
December 31, 1999. Given the accounting standards in Japan at the time, Olympus did not feel
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compelled to report the unrealized losses they had incurred on the firm’s securities investments.
However, Japan’s Business Accounting Deliberation Council1 expressed increasing interest in
fair value accounting during this period, and it became apparent that Olympus would eventually
be required to report these losses. In fact, the Business Accounting Deliberation Council
announced its intention to introduce fair value accounting in 1997 and completed its accounting
standard for financial instruments in January 1999 (Gordon 1999).