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.
DOI:10.24056/KAR.2022.06.001 KAR Vol.47(No.3) 1-31, 2022
This paper examines the effect of managers’ career concerns on the precision of management earnings forecasts. We find evidence that market responses are significantly negative when earnings realizations are outside the range of managers’ earnings forecasts, especially when the realized earnings fall outside the lower bound of the forecast range. To the extent that stock price reactions reflect market assessments of managers’ ability, this evidence suggests that providing narrow-range (i.e., high-precision) forecasts can increase career-related costs. We thus hypothesize that CEOs who are more concerned about market assessments of their ability and hence about their career prospects have greater incentives to widen forecast ranges to avoid negative market assessments. Consistent with this hypothesis, we find that short-tenured CEOs and non-founders provide earnings forecasts less precisely than long-tenured CEOs and founders do.
Tax Avoidance and Firm Value: International Evidence
Yeji Lee , Kiho Choi
DOI:10.24056/KAR.2022.06.002 KAR Vol.47(No.3) 33-74, 2022
Desai and Dharmapala (2006, 2009a, b) and Desai et al. (2007) propose that corporate governance plays a crucial mediating role in the relationship between tax avoidance and firm value (the D&D theory). This theory has received considerable attention in the tax accounting literature, but evidence remains mixed. We extend the D&D theory to an international setting and argue that country-level characteristics moderate the relationship between tax avoidance and firm value. Using a sample of firms from 45 countries, we find that the relationship between tax avoidance and firm value is positive when transparency or stock market development is high but negative when investor protection is strong. Our findings suggest that a key determinant of the positive effect of tax avoidance on firm value is a transparent and developed stock market environment. Under low transparency, shareholders in countries with strong investor protection regard tax avoidance as a negative signal of managerial diversion due to a lack of understanding of tax avoidance. Our research contributes to the debate on the link between tax avoidance and firm value according to the D&D theory by providing additional insights on the mediating roles of country characteristics.
DOI:10.24056/KAR.2022.06.003 KAR Vol.47(No.3) 75-101, 2022
This paper examines the effect of foreign ownership on firms’ labor investment efficiency, which is an essential factor for the firms’ long-term operating performance. Further, this paper examines whether foreign ownership alleviates over or under investment in labor, focusing on the Korean stock market. Using Korean listed 22,924 firm/year observations from 1997 to 2019, we estimate abnormal net hiring by using the abnormal portion of net hiring for each firm/year observations. The empirical results suggest that foreign ownership is negatively associated with the absolute value of abnormal net hiring, which indicates that foreign ownership enhances firms’ labor investment efficiency. Additional analyses suggest that foreign ownership alleviates over and underinvestment in labor in the Korean stock market. Further analyses suggest that foreign ownership’s monitoring effect toward labor investment efficiency enhances sustainability operating performance. Robustness tests, including firm-fixed effects and two-stage least squares estimation, supports our main results. There is an ongoing debate on whether foreign ownership’ active monitoring role in developing countries. Foreign ownership conducts an active monitoring role in developing countries regarding labor investment. Thus, our results suggest that foreign ownership may be an one of determinant of enhancing firms’ labor investment efficiency in Korean stock marekt.
foreign ownership, labor investment efficiency, over and under-investment in labor
DOI:10.24056/KAR.2022.06.004 KAR Vol.47(No.3) 103-138, 2022
Despite the significant increase in US multinationals’ overseas expansion, and the growing share of foreign earnings among the total reported earnings, empirical literature on earnings conservatism has mostly focused on firms’ total earnings. This paper focuses on the segmental earnings conservatism of foreign and domestic operations of US multinationals for the period from 1985 to 2015. We examine how differently US multinationals exhibit earnings conservatism of foreign and domestic operations, and investigate whether the differential earnings conservatism between foreign and domestic operations can be explained by repatriation tax cost, a tax-based explanation for earnings conservatism. Our empirical results show that the degrees of earnings conservatism are significantly less pronounced for foreign operations than domestic operations, suggesting that the presence of earnings conservatism is primarily driven by domestic earnings. More importantly, this study reveals that the tax cost of repatriation can partially explain the lower degree of foreign earnings.
The Effect of Abnormal Audit Hours on Earnings Persistence and Discretionary Accruals: Using the Rank-Specific Audit Hours Data
Jongil Park , Kyunga Na , Yun-jeong Lee
DOI:10.24056/KAR.2022.06.005 KAR Vol.47(No.3) 139-181, 2022
This study examines how abnormal total audit hours and rank-specific audit hours affect earnings quality, proxied by earnings persistence or discretionary accruals. The sample is collected from listed firms in Korea between 2014 and 2019. In particular, this study uses rank-specific audit hours which have been publicly disclosed under the External Audit Act Amendment in 2014 in order to estimate abnormal audit hours for five different ranks: audit quality reviewer, director, registered accountant, associate accountant, and expert in other areas such as tax, IT audit, and asset valuation. Our major findings are fourfold. Firstly, abnormal total audit hours as well as abnormal audit hours for audit quality reviewer, registered accountant and associate accountant are negatively associated with earnings persistence. Secondly, we do not observe any significant relations between discretionary accruals and abnormal audit hours, total or rank-specific. Thirdly, the results stay qualitatively similar when discretionary accruals are replaced with loss avoidance (i.e., reporting small positive earnings), while absolute discretionary accruals appear to be positively related to abnormal audit hours by two positions (audit reviewer and director) as well as abnormal total audit hours. Lastly, results based on log of audit hours (total or rank-specific) are sensitive to the inclusion of firm size as a control variable in the regression model whereas those based on abnormal audit hours are relatively stable regardless of the presence of firm size in the control. Our results suggest that audit hours may act as an indicator of audit risk rather than audit quality.
audit hours by rank, total audit hours, abnormal measures, earnings persistence, discretionary accruals, loss avoidance
DOI:10.24056/KAR.2022.06.006 KAR Vol.47(No.3) 183-204, 2022
From a manager’s rational decision-making perspective, cost stickiness is caused by holding surplus resources rather than disposing of them immediately and can be applied as part of the information on expected future sales rebounds. This paper investigates how innovation, as a key component of business strategy, changes cost behavior. Innovation is closely tied to the long-term survival of an enterprise and plays an important role in creating sustainable competitive advantage and superior performance. We hypothesized that the resource retention rate will change according to the managers’ aim and the expectation over the innovation process. Using Korean manufacturing firm data from the Korean Innovation Survey, we provide evidence that firms implementing innovation exhibit greater cost stickiness than those that do not. Furthermore, the reservation of resources occurred mainly in a pessimistic situation, which confirms that the company’s innovation strategy aims to overcome the unfavorable current situation of the company. We also verified the different resource commitment decisions that depends on strategic differences by product and process innovation. The findings of the study help to understand how resource allocation is driven by managers’ decisions in the context of each type of innovation.
cost behavior, innovation strategy, product innovation, process innovation
Combined Dividend and Earnings Reporting Policies: Signaling or Managerial Opportunism?
Kyung Soon Kim , Yun W. Park , Jin Hwon Lee
DOI:10.24056/KAR.2022.06.007 KAR Vol.47(No.3) 205-242, 2022
In the context of controversy over the effect of dividend policy and earnings management on corporate value, this study analyzes future stock returns to investigate whether combinations of dividend and earnings reporting policies signal true firm value or managerial opportunism. We classify firms as low, high, and no-dividend firms, and identify earnings reporting as aggressive or conservative. Our findings are summarized as follows. First, low-dividend policy firms showed the largest negative excess return, and firms that reported aggressive earnings showed negative excess returns. We also find that low dividend firms choose aggressive earnings reporting. These results suggest the possibility that managers link dividend and earnings reporting policies. Second, firms that combine low dividends with aggressive earnings reporting experience more negative excess stock returns, and this effect is more pronounced with low ownership concentration and share repurchases. This result suggests that in firms with large agency risk and information asymmetry, managers have an incentive to manipulate stock prices by combining low dividends and aggressive earnings reporting policies. Overall, our findings suggest that opportunistic managers may combine low cost signals to inflate stock prices, taking advantage of weak monitoring environments.
Managerial Ability and Analyst Participation on Earnings Conference Calls
Minkwan Ahn , Sehee Kim , Hangsoo Kyung
DOI:10.24056/KAR.2022.06.008 KAR Vol.47(No.3) 243-274, 2022
This paper investigates whether analysts’ assessments of managerial ability affect their incentives to put their names in the queue and ask a question on an earnings conference call. We find that managerial ability is positively associated with the number of questions asked on the earnings conference call and managerial ability is negatively associated with the likelihood that there are zero questions asked on the conference call. These findings suggest that higher ability managers elicit more questions from analysts on earnings conference calls. We further investigate how managerial ability affects the information provided for a set number of questions asked on the conference call by looking at changes in the average analyst forecast error around the conference call. We find that when managers of higher ability are asked more questions, the average forecast error becomes smaller, suggesting that more able managers provide more informative answers to the questions they are asked. This finding also validates analysts’ apparent beliefs that managers of lower ability are less likely to provide an informative answer to questions asked on the conference call. This paper contributes to our understanding of the interactions between analysts and managers that take place during earnings conference calls.