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.
Does the Foreign Direct Investment Companies use Cash Flow Freed Up by Not Paying Taxes to Invest? 외국인직접투자기업은 조세절감액을 통해 창출된 현금흐름을 투자에 사용하고 있는가?
우혜진 Hye-jin Wu , 홍영은 Young-eun Hong , 한정일 Jung-il Han
DOI:10.24056/KAR.2022.10.001 KAR Vol.47(No.5) 1-42, 2022
The purpose of this study is to find out how foreign direct investment companies(“FDI companies”) are using the cash flow freed up by not paying taxes, which we refer to as tax-related cash. First of all, this study examines how the differential characteristics of FDI companies and foreign indirect investment(“FII”) affect the use of internally generated cash flows. Following the discussion of Guenther et al.(2020), we divide internally generated cash flows into tax-related cash and other after-tax cash flows. And we verify that corporations will use tax-related cash differently than the cash flow obtained in other ways due to uncertainty about potential repayment of the tax-related cash to the government. We find that FDI companies have relatively lower levels of financial constraints than FII companies, and FDI companies allocate more internally generated cash flows to cash savings. We also find that firms invest less tax-related cash, unlike other sources of cash flow. We also provide evidence that the extent to which the tax-related cash is used for facility investment or accumulated inside the company did not discriminate between FDI companies and FII companies. However, the degree of use of dividends was found to be higher in FDI companies. Through this, we find that the positive effect of tax reduction and exemption for FDI companies to revitalize the domestic economy is low, but rather is being used as a dividend payment. It is also expected to provide implications for system improvement targeting foreign direct investment companies in the future.
외국인직접투자기업, 내부적으로 창출한 현금흐름의 배분, 조세절감으로 창출된 현금흐름, foreign direct investment company, allocation of internal cash flow, tax-related cash
Audit Market Competition and Audit Opinion Shopping 감사시장의 경쟁과 감사의견구매
조재희 Jaehee Jo , 정희선 Heesun Chung , 김예원 Yewon Kim
DOI:10.24056/KAR.2022.10.002 KAR Vol.47(No.5) 43-75, 2022
Auditor change for opinion shopping(OS) purpose occurs when firms dismiss incumbent auditors and hire new auditors that are more likely to issue a clean audit opinion. This change is a symptom of the impaired audit quality for successor auditors, and worldwide regulators have devised a way to prevent firms from engaging in OS. This study investigates whether audit market competition affects firms’ opportunistic auditor choices. There are two conflicting predictions on the OS effect of audit market competition. On the one hand, auditors that obtain greater bargaining power over client firms in less competitive audit market are more likely to maintain the independence and reject OS clients. Thus, we predict the lower audit market competition, the less OS-driven auditor changes. On the other hand, if auditors remain complacent with their oligopolistic power in less competitive audit market, audit quality can be deteriorated. Then, we expect that low audit market competition can encourage OS-driven auditor changes. Our findings using Korean data support the former prediction that auditors in low audit market competition are less likely to accept OS clients. We also find that the role of audit market competition in deterring firms’ OS attempts is observed in firms audited by Big 4 auditors as well as those audited by non-Big 4. These findings provide important implications for worldwide regulators to improve audit quality and support the Korean regulator’s policy to increase the size of auditors.
감사시장의 경쟁, 감사의견구매, 감사인 교체, Big 4 회계법인, audit market competition, audit opinion shopping, auditor change, Big 4 firms
Ga-young Choi , Bryan Byung-hee Lee , Woo-jong Lee , Hee-yeon Sunwoo , Seunghee Yang
DOI:10.24056/KAR.2022.10.003 KAR Vol.47(No.5) 77-105, 2022
Related literature documents that corporate spinoffs decrease parent firms’ industrial scope so the firms can better focus on core businesses. However, prior studies show that not every spinoff is efficiency-increasing and hence value-adding. This study extends the understanding on the implication of spinoffs by examining whether auditors understand the differential risk implications of corporate spinoffs. Specifically, we investigate whether auditors reflect their assessment on corporate spinoffs in audit pricing. Based on 114 corporate spinoffs in Korea for the period from 2002 to 2017, we first document that audit fees decrease significantly for ongoing parent companies after spinoffs, which appears to reflect reduced audit scope due to clients’ scale reduction. An exclusive focus on consolidated spinoffs in which the audit scope remains unaffected provides more interesting evidence. We reveal that the fee decrease after spinoffs is more salient for parent clients with greater risk reduction, proxied by 1) more positive market reaction and 2) higher performance growth. Our findings indicate that both the scale effect and the risk effect play distinctive roles in audit pricing during spinoffs.
A Firm’s Compliance Status with 15 FSC Mandated Core Governance Indicators and Credit Ratings: Focusing on Mandatory Corporate Governance Report Disclosure
Hansol Lee , Hyoungseok Choo , Ho-young Lee
DOI:10.24056/KAR.2022.10.004 KAR Vol.47(No.5) 107-140, 2022
This study examines whether a firm’s compliance level with the core corporate governance indicators stated by authorities significantly affects a firm’s credit ratings. This study uses hand-collected data on firms’ compliance status with 15 core corporate governance indicators from the annual corporate governance reports. Following the management disciplining hypothesis, which argues that strong corporate governance mitigates a firm’s agency problems and information asymmetry, this study hypothesizes that higher compliance levels with the core corporate governance indicators would positively affect a firm’s credit ratings. Using 309 firm-year observations for 2018-2020 period, this study finds a positive relationship between a firm’s compliance levels with the core corporate governance indicators and its credit ratings. Furthermore, the results reveal that, among the three categories of core corporate governance indicators, a firm’s compliance levels with the board of directors- and audit committee-related core corporate governance indicators significantly impact the firm’s credit ratings. By employing a difference-in-difference approach, this study also verifies that the impact of compliance levels with 15 core governance indicators stems from the mandated regulation on the disclosure of a firm’s compliance levels with core governance indicators. The study’s results provide practical implications for management, regulators, and investors, as they demonstrate the economic benefits of complying with the core corporate governance indicators. Moreover, this study provides empirical evidence that helps regulators encourage firms to comply with the core governance indicators as stated by authorities.
A Study on the Effectiveness of Tournament Theory in Accordance with the Type of CEO 최고경영자 유형에 따른 토너먼트 이론의 효과성 검증
홍준용 Jun Yeung Hong , 유승원 Seung Weon Yoo
DOI:10.24056/KAR.2022.10.005 KAR Vol.47(No.5) 141-174, 2022
This study analyzes the effectiveness of tournament theory according to the type of CEO. Specifically, this study analyzes whether the relationship between the compensation gap between the CEO and top managers and firm performance and firm value are differentiated between professional-CEO managed firms and owner-CEO managed firms. The empirical results using KOSPI listed firms from 2013 to 2019 are as follows. First, this study finds that there is a positive relationship between the compensation gap between the CEO and top managers and firm performance and firm value in the professional-CEO managed firms. On the other hand, in owner-CEO managed firms, there was a insignificant relationship between the compensation gap and firm performance, but rather had a significant negative relationship with firm value. In other words, within owner-CEO managed firms, as promotion opportunities of managers to the CEO are limited, the compensation gap does not function as an incentive. Second, even though the owner manager takes the CEO position, when a professional CEO exists as co-CEOs, this study finds significant positive relationship between the compensation gap and firm performance and firm value. This means even in owner-CEO managed firms where the owner takes the CEO position, the compensation gap can give incentive to the managers if they have promotion opportunity to a co-CEO. The contribution of this study is as follow. This study provides policy implications that the CEO type and CEO structure should be considered when designing compensation scheme to provide optimal level of incentives to managers using compensation gap.
토너먼트 이론, 전문/소유경영기업, 복수 최고경영자 체제, 자기자본비용, tournament theory, professional-ceo managed firms, owner-ceo managed firms, co-ceo structure, cost of equity
The Effect of Types of Financing on Earnings Management and Operating Cycle 자본조달방법이 이익조정과 영업주기에 미치는 영향
김단비 Dahn-bee Kim , 김지혜 Ji Hye Kim
DOI:10.24056/KAR.2022.10.006 KAR Vol.47(No.5) 175-206, 2022
This study investigates the effect of types of financing on financial reporting considering the different effect of financial variables on investment decisions. Specifically, this paper investigates that the effect of equity financing and liability financing on earnings management and operating cycle. We find that discretionary accruals and operating cycles decrease prior to liability while discretionary accruals and operating cycles increase prior to seasoned equity offering. Moreover, we perform the analysis by categorizing liability financing into loan and bond issue. We find that operating cycles decrease prior to loan financing significantly while operating cycles increase in large prior to bond issues significantly. To figure out the results of bond issues, we perform additional test after categorizing bond issues into special bond issues and plain vanilla bond issues. We find that discretionary accruals increase prior to special bond issues insignificantly and operating cycles decrease prior to plain vanilla bond issues insignificantly. This study contributes to the literature by showing that different financial variables are adjusted prior to financing according to the types of financing because investment decisions are affected differently by financial variables according to the types of financing. Second, this study can provide clearer explanation for different empirical results about the associations between debt capital and earnings management. Last this study contributes to the literatures by suggesting the variable, operating cycle as an important variable to liability financing, especially loan.
ESG Bad News and Management Voluntary Forecast 부정적인 ESG 뉴스와 경영자의 자발적 예측 공시
이효림 Hyorim Lee , 유승원 Seung Weon Woo
DOI:10.24056/KAR.2022.10.007 KAR Vol.47(No.5) 207-245, 2022
This study examines whether ESG bad news affects the accuracy of management voluntary forecasts. Prior studies mainly focus on stock market reaction to the management voluntary forecasts, this paper extends the determinant of management voluntary forecasts to non-financial ESG news in the media. We select 18 keywords based on indices used in MSCI dataset for the measurement of ESG performance and then search for negative ESG news using the keywords from 2012 to 2019. Using the news and management voluntary forecasts, we find that ESG bad news increases management sales forecasts. This suggests that the negative ESG news calls many stakeholders’ attention and managers voluntarily disclose sales forecasts in order to meet the information demand and to alleviate negative reputation. Moreover, ESG bad news is positively correlated with the optimistic bias of management sales forecasts. This finding indicates that managers tend to seek short-term benefits even at the expense of the potential risk caused by inaccurate forecasts. Finally, the manager who discloses the optimistic sales forecasts appear to manipulates reported earnings using the accrual management to reduce his forecast error even though ESG bad news is negatively correlated with the management sales forecasts errors. The results imply that managers manipulate accrual to meet the level of optimistic forecasts in response to ESG bad news because more significant forecast errors increase the variance of operating performance penalizing the manager later. This study contributes to the literature by showing that the negative ESG news increases the bonding cost leading to welfare loss.
Stakeholder Orientation, Customer Concentration, and Trade Credit Provision
Jongha Kim , Sehee Kim , Meeok Cho , Bryan Byung-hee Lee
DOI:10.24056/KAR.2022.10.008 KAR Vol.47(No.5) 247-270, 2022
This paper examines whether stakeholder orientation affects firms’ trade credit policy and whether the relation between stakeholder orientation and trade credit provision is affected by customer concentration. Trade credit is the deferment of payments for purchases, and it can benefit customers by providing then with short-term financing. Stakeholder orientation allows managers and directors to incorporate the interests of non-shareholder stakeholders into making business decisions, for example, by extending trade credit to customers. We use the staggered enactment of state-level constituency statutes in the U.S. as an exogenous shock to stakeholder orientation to investigate the relation between stakeholder orientation and trade credit provision. The difference-in-differences analysis reveals that compared to the suppliers unaffected by the constituency statutes, those affected increase trade credit provision to a greater extent. Furthermore, we find that this relationship is more salient for suppliers with a lower customer concentration, indicating that suppliers are better able to extend trade credits when they have a stronger bargaining power towards customers. We further find that the increase in trade credit attributable to the rule change is associated with the enlarged customer base. Lastly, the additional analysis on dynamic effect of treatment shows that our findings are unlikely to be driven by pre-existing trends in trade credit provision. Combined, this study implies that enhanced stakeholder orientation significantly affects firms’ decision making process.