Korean Accounting Review (KAR) is the official journal of the Korean Accounting Association. The Korean Accounting Association (KAA) is the largest and oldest academic organization of accounting scholars and practitioners in Korea. It aims to create a fertile environment for innovation and collaborative research, to foster and improve research for the development and the promotion of accounting, and to develop a powerful network among scholars, practitioners, and authorities concerned with political decision making in this field.
The Effect of Accruals Quality on Split Bond Ratings
Catherine Heyjung Sonu
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Abstract
This study examines whether good accruals quality is associated with less disagreement among credit rating agencies. Distinct from prior studies that focus on equity analysts, I examine how the quality of financial information influences rating agencies in determining bond ratings. Precise accounting information reduces the information risk of the users of the financial statements such as the credit rating agencies, and thereby affects the frequency and magnitude of split bond ratings by credit rating agencies. Specifically, this paper examines whether the quality of accounting information, proxied by accruals quality, reduces disagreement about bond ratings (i.e., split bond ratings) among the three rating agencies in Korea. I test the hypothesis which predicts that poor accruals quality raises information uncertainty about a firm’s financial condition for creditors, thereby increasing split bond ratings among rating agencies. Using 1,867 observations for public bonds in Korea, I show that better accruals quality is associated with lower frequency and magnitude of split bond ratings by credit rating agencies. This finding persists after controlling for other firm-specific factors that affect split ratings, and is robust to a battery of sensitivity analyses.
Key Words
accruals quality, credit rating agency, information risk, split bond ratings
Dynamic Auditor Competition and Audit Quality in the United States
Ahrum Choi , Jeong-bon Kim , Yoonseok Zang
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Abstract
Regulators and audit market participants have concerned that less competitive audit market makes auditors to reduce the incentives to conduct high-quality audits. While a few studies examine the effect of competition in the U.S. local audit markets, they report conflicting evidence using the static Herfindahl index which is arguably noisy in capturing the intensity of competition. The purpose of this paper is to provide evidence on the effect of dynamic auditor competition in local audit markets on audit quality. For this purpose, we employ a measure to capture the dynamic nature of audit market competition: the proportion of clients switching auditors in the local market. Employing this measure, we find evidence suggesting a positive relation between auditor competition and audit quality and that the relation is stronger in large MSAs and for clients whose relative importance to audit office is smaller. This paper adds to the competition-audit quality literature by utilizing dynamic measures of audit market structure. In addition, the findings in this paper provide important evidence in response to the regulatory concerns that low competition is harmful to audit quality in a sense that it can cause auditor complacency and less rigorous audit procedures.
Industry Specialist Auditor and Client Firms’ Real Earnings Management
Seunghee Yang , Hee-yeon Sunwoo
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Abstract
This study investigates whether industry specialist auditors restrict the use of excessive real earnings management which is performed through the adjustment of timing or magnitude of real business activities. Auditing standards require auditors to use industry-specific knowledge during auditing process. Indeed, accounting firms recently put great effort into enhancing industry expertise, highlighting the importance of industry specialty in maintaining high audit quality. Therefore, industry specialist auditors may effectively hinder clients from engaging in the real earnings management as they do in relation to client’s accruals-based earnings management. On the other hand, although they tend to constrain clients from engaging in accruals-based earnings management, they may not pay much attention to the real earnings management since restricting real earnings management is not under auditors’ direct jurisdiction. Thus, it is not clear whether industry specialist auditors influence the magnitude of clients’ real earnings management. Using Korean data, we find that clients of industry specialist auditors tend to rely less on real earnings management than those of non-industry specialist auditors. This suggests that industry specialist auditors limit clients‘ use of opportunistic real earnings management as they do for the accrual-based earnings management.
Key Words
industry specialist auditor, audit quality, real earnings management, accruals-based earnings management
Association between International Diversification Strategy and Future Stock Price Crash Risk
Seun Young Park
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Abstract
This paper tests whether the corporate global diversification lessens the information asymmetry between the firm and the investors and thus associated with a negative future stock price crash risk in Korean stock market. As the increased integration of global economies, an increasing number of firms have pursued global diversification over time. However, less attention has been given to the economic consequences or benefits in equity market from global diversification. Using a large sample of firms listed in KOSPI over 2000-2017, this paper finds that the degree of corporate globalization is less likely to experience firm-specific future stock price crashes. The results are consistently robust across alternative measures of globalization and crash risk. Moreover, the additional finding shows that the negative association between globalization and future crashes is pronounced when the firms are not followed by analysts. And discounts for global firms significantly decrease in economic downturns, suggesting an incremental hedging benefit of diversification. These findings are robust when the estimates account for the endogeneity of globalization. Overall, the empirical findings suggest that corporate diversification may create an business and information environment that partly mitigates the managerial opportunistic motives to withhold bad news, supporting positive effect of global diversification.
Key Words
global diversification, stock price crash risk, information asymmetry, agency cost, hedging
The Role of Excuses in Investing into Information Quality
Byungjin Kwak , Hee-yeon Sunwoo
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Abstract
We analyze a manager's choice of precision of the information in a repeated cheap talk game under which the manager can excuse his lie by blaming the poor quality of the information system. In this setting, the manager can protect his reputation for the future period if the precision of information is imperfect, providing the manager with incentives to choose the poor quality of information system. However, the analyses show that even though the manager can excuse his lie relying on the imperfect precision, he finally selects perfect precision in most cases. The only exception is when he cannot publically determine the precision and he knows that his interest is not aligned with investor's. Even in this case, he randomizes his choice of information quality between perfect and imperfect precision. Otherwise, the manager chooses the perfect precision of information system. Our theoretical model provides important insights into why managers provide truthful or precise disclosures in most cases even if they are able to lie. In addition, our findings explain why they sometimes deviate from their normal practice and provide inaccurate, biased, or imprecise forecasts.
Key Words
cheap talk game, information precision, excuse, voluntary disclosure
This study investigates the relationship between managerial ability and a firm’s dividend policy in the Korean stock market. Korean firms have been criticized for low dividend payments. Foreign investors in Korean firms, taking a dramatically increasing portion of the ownership, are demanding management to raise dividends. However, dividend policy must involve not only the fair distribution of profits to shareholders but firm growth and investment opportunities. Also, in the recession period, managers should be able to evaluate the costs and benefits of paying dividends to decide an optimal size of distribution. Motivated by the fact that managers have discretion over the firm’s payout policy, we examine how the firm’s dividend payout and its performance depend upon the ability of management. Using Korean firms listed in KOSPI market during 2003-2013, we find the following results. First, high-ability managers show the higher propensity of paying dividends and the larger size of dividends than low-ability managers. Second, the positive relationship is more pronounced in the firms with higher information asymmetry and weaker corporate governance. Lastly, among the competent managers, the future performance is greater for managers who pay larger dividends than those who pay smaller dividends. This study contributes to the literature by providing evidence that high-ability managers are more willing to pay larger dividends to benefit shareholders, and the dividend payments do not harm future firm performance.
Aggregate Discretionary Accruals and Future Market Returns: International Evidence
Eunyoung Lee , Eung Gil Kim , Soongsoo Han
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Abstract
We conduct a cross-country analysis to provide further insight into the “lean-against-the-wind” hypothesis of aggregate discretionary accruals (Kang et al. 2010), i.e., opportunistic use of discretionary accruals in times of market undervaluation. We investigate whether the reversal of firm-level effect extends to non-U.S. firms and identify institutional factors that affect the association between aggregate discretionary accruals and future market returns. We find that the association between aggregate discretionary accruals and future market returns is less positive in countries with stronger disclosure requirements and more in countries with greater financial analysts, suggesting that aggregate discretionary accruals contain less garbling component in stronger legal/regulation environments and more garbling component in countries where the market incentive to manipulate earnings is high. We also use a K-median clustering to classify the sample countries into two clusters using seven country-level institutional variables. The results suggest that countries that have institutional features that lead to earnings management have greater coefficients on aggregate discretionary accruals, while countries that have institutional characteristics that mitigate earnings management behavior have smaller coefficients on aggregate discretionary accruals. In sum, our results are broadly consistent with the “lean-against-the-wind” hypothesis and highlight the role of institutional and socio-economic factors in understanding the phenomenon.
Revisiting the Profitability Premium in the Korean Stock Market
Su Jeong Lee , Seunghwan Kim , Seunghee Yang
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Abstract
Prior studies provide mixed evidence as to whether the association between current profitability and future stock returns, namely profitability premium, exists in the Korean stock market. This study revisits this issue by employing various measures of profitability proposed by prior literature. Using twelve profitability measures including annual and quarterly measures, we find that the profitability premium consistently exists across all profitability measures in the Korean market, despite differences in its magnitude and significance depending on the definition of profitability. Notably, quarterly profitability measures show stronger relations with future returns than annual profitability measures, highlighting the importance of using more timely information to capture the predictive ability of current profitability. In addition, we find that the profitability premium is higher for firms with larger information asymmetry, consistent with a view that firms' information environment is an important factor affecting market anomalies.
