The Journal of Asian Finance, Economics and Business
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v.8
no.2
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pp.365-371
/
2021
In the wake of several high-profile corporate accounting scandals, there has been evidence that companies are more eager to hire Chief Executive Officers (CEOs) with an accounting background. This signals that CEOs with an accounting background are recognized and trusted by the corporate world to boost the quality of financial reporting of a company. If it is so, in the context of combating the earnings management, hiring CEOs with an accounting background (being a conservative accounting practitioner), could become one of the effective internal corporate governance mechanisms (CGM) to bring down the earnings management activities. This study attempts to provide insight into the level of conservatism of the CEO with an accounting background. Following Basu (1997) and Khan and Watt (2009), the firm-year measure of conservatism (C_Score) was obtained, which later was associated with the accounting education of the CEO to determine their relationship. As expected, CEOs with accounting background exhibit a higher level of moral reasoning than their non - accounting educated counterparts. The finding of this study is useful to persuade the policymaker to consider lifting the trend of hiring a CEO with an accounting background as one of the best practices that the companies can work out to lessen earnings management activities.
The Journal of Economics, Marketing and Management
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v.12
no.3
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pp.13-22
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2024
Purpose: While there has been extensive research on discretionary accruals (hereafter, 'DA') and accounting conservatism, interpretations have varied among researchers depending on how discretionary accruals are determined as proxies. This study investigates the relationship between discretionary accruals (DA) and accounting conservatism, focusing on the distinctions between signed DA and absolute DA. Research design, data and methodology: Using financial data from companies listed on the KOSPI and KOSDAQ markets from 2010 to 2020, we employ regression analysis to explore how signed and absolute DA impact accounting conservatism. This approach allows us to parse out the effects of positive versus negative discretionary accruals systematically. Results: Our findings indicate a divergent impact of DA on accounting conservatism. Specifically, in cases of negative DA, an increase in DA corresponds with heightened accounting conservatism. Conversely, when DA is positive, increases in DA do not exhibit a significant relationship with changes in accounting conservatism. These effects suggest that the nature of DA-whether it represents upward or downward earnings adjustments-critically influences its relationship with conservatism. Conclusions: The results elucidate the nuanced role of discretionary accruals in influencing accounting conservatism. The decrease in accounting conservatism associated with absolute increases in DA appears primarily driven by groups with downward earnings adjustments. This suggests that as negative DA diminishes toward zero, accounting conservatism intensifies, whereas positive DA does not have a parallel effect.
This study aimed to examine earnings quality of firms selected as Global Champs project which has been promoted by the government since 2013 to support small and medium sized enterprises, for the screening year(t-1) and selected year(t). Earing quality is measured as the value of discretionary accruals estimated by Dechow et al.(1995) adjusted Jones model and Kothari et al.(2005) model, respectively. I analyze the differences of earning quality between the Global Champ firms and the paired firms selected through criteria of the similar total assets and the same industry in the screening year and the selected year. This study is motivated by the needs of measurement of the performance of the Project from the accounting transparent point of view. As the results of this study, major findings are summarized as follows. Firstly the earnings quality of the selected firms was lower than that of the paired firms. This can be explained as a result of motivation of earnings management by companies eager to meet the requirements to be selected for the Project. Secondly, in the selected year, the earnings quality was proved to improve, comparing to the screening year. This can be explained by the efforts of companies to reinforce management innovation and transparent management, which in turn led to positive effects on the earnings quality. These findings were found to be consistent in the additional analyses, where the earning quality of the reconstructed sample with only selected companies was compared for the screening year and the selected year, based on the year before the screening year(t-2).
We investigate whether the association between management overconfident tone and the level of audit effort measured by audit fees and hours differs depending on the level of earnings management. Prior studies suggest that firms led by overconfident managers are likely to initiate risky investments, report low quality financial statements, and have material weaknesses in internal control system. These characteristics, combined together, result in higher audit risk. At the same time, auditors assess audit risk based on the quality of financial reporting, measured by level of earnings management. As a result, the assess audit risk is likely to reflect the combined effect of management overconfidence and the level of earnings management. In this paper, we investigate whether auditors differentiate the effects of real earnings management (REM) and accrual-based earnings management (AEM) when they assess the audit risk related management overconfident. Using the CEO's letter published in 2018, we measure the CEO's tone representing the degree of overconfidence (i.e., activity). Based on this measure, we find that the positive association between managerial overconfident tone and audit effort is more pronounced as the level of REM is higher. However, we find that the baseline association does not vary depending on the level of AEM. These results suggest that auditors consider the managerial overconfident severer when such characteristic accompany the higher level of REM, which can be outcome of aggressive business decisions possibly leading to the higher audit risks. We further find that these results are stronger for Big 4 auditors and continuing auditors. This paper contributes to the literature and practice as follows. First, we provide contextual evidence on how auditors reflect managerial characteristics in the audit process by documenting that auditors actively increase their audit efforts only when overconfident managerial characteristics are highly likely to lead to audit risk. This result suggests that auditors conduct external auditing considering both the efficiency and effectiveness of the audit process. Second, we suggest that auditors use information obtained from a wide range of sources to identify audit risks. Our results provide evidence of how the auditing standards, which do not provide detailed guidelines for audit risk assessment, are being applied in practice. Finally, our results also enhance the understanding of how audit fees are determined. Combined with the studies related to audit pricing, we provide the important reference for discussion between the auditor and the auditee about the audit fee that has created acute tension after the enforcement of the new External Audit Act.
This paper analyzes empirically how analysts' forecasts affected by ownership structure. This study examine a sample of 1,037~1,629 the analysts' forecasts of firms registered in Korean Stock Exchange in the period from 2000 to 2006. The empirical results are summarized as follows. First, from the analysis, companies which have higher major shareholder's holdings tend to increase earnings forecast errors and earnings forecast accuracy. Meanwhile, companies which have higher institution shareholder's holdings tend to decrease earnings forecast errors and earnings forecast accuracy. This result is in line with the view of previous works that companies with higher major shareholder's holdings look towards more of analysts' optimistic forecasts in order to maintain friendly relations with major shareholders. Because of analysts' private information use from major shareholders, earnings forecast accuracy is higher in high major shareholder's holdings firm than in high institution shareholder's holdings it. Second, this analysis is whether the minimal required selection condition of outside directors, audit committee adoption and audit quality affect the relation between ownership structure and analysts' forecasts. This result is that variables related corporate governance do not affect statically the relation between ownership structure and analysts' forecasts. The meanings of this paper is to suggest the positive relations between ownership structure and analysts' forecasts. After this, if analysts will notice forecasts of more many firms, capital market will be more efficient and this field works are plentiful. Also it will need monitoring systems not to distort market efficiency by analysts' dishonest forecasts.
The Journal of Asian Finance, Economics and Business
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v.6
no.2
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pp.45-54
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2019
This study examines whether auditors restrain the analysts' opportunistic behavior as reviewing the companies' interim reports. Analysts' forecasts show a walkdown pattern in which their optimism has decreased as the earnings announcement date has approached. At the beginning of the year, there is a lack of high-quality benchmark information that enables information users to judge the accuracy of analyst's earnings forecasts. Thus, early in the year, analysts are highly inspired to disseminate optimistic forecasts in order to gain manager's favor. In this study, we examine adequate benchmarks prevent analysts from disclosing optimistically biased forecasts. We conjecture that auditors' efforts might mitigate analysts' walkdown pattern. To test this hypothesis, we use data from Korea, where it is mandatory to disclose auditor's review hours. We find that the analyst forecast's walkdown decreases with the ratio as well as the number of audit hours. It implies that an auditor's effort in reviewing interim financial information has a monitoring function that reduces analysts' opportunistic optimism at the beginning of the year. We conjecture that the tendency will be more pronounced when BIG4 auditors review the interim reports. Consistent with the prediction, BIG4 auditors' interim review effort is more effective in suppressing the analysts' walkdown.
The Journal of Asian Finance, Economics and Business
/
v.6
no.2
/
pp.247-255
/
2019
This study examines the different roles of cash flow in assessing investment returns in the Association of Southeast Asian Nations (ASEAN). The analysis covers over 900 listed firms across Malaysia, Indonesia, Philippines, Singapore and Thailand for the period post the Asian financial crisis of 2001-2017. Firm-level panel data analysis shows that cash flow factors are important in all contexts of cash return on assets, earnings quality and market value multiple across the region even after controlling for typical measures of profitability. The results suggest that firms should manage cash flow prudently in considerations of firm value from the shareholder's perspective, measured directly using stock return. Cash profitability on assets should become an important firm performance indicator, whilst higher cash component over reported earnings is preferred. The market also tends to respond favourably to cash flow yield as a price multiple in valuation, outpacing the role of earnings yield. Such findings are robust across the pre and post subprime crisis periods, across estimation methods pertaining to finance panel standard errors, as well as across static and dynamic considerations of returns. It is hence sensible to consider cash flow factors in the research pertaining to asset pricing and factor investing in the ASEAN region.
The Journal of Asian Finance, Economics and Business
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v.8
no.2
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pp.387-399
/
2021
This study mainly aims to examine the effect of intangible assets on the value relevance of the Gulf Cooperation Council (GCC)-listed non-financial firms. This study tested three types of models by using a large sample of non-financial firms listed in GCC countries as emerging markets from 2008 to 2016. The types of models are accounting information (earnings per share and book value of share) without intangible assets model, intangible assets model, and accounting information (earnings per share and book value of share) with intangible assets model. Ordinary least square (OLS) shows mixed results as intangible assets improve the value relevance of accounting information positively in UAE and negatively in Kuwait but not in other countries. The study documents a robust positive relationship between intangible assets and earnings quality in terms of value relevance in KSA and Qatar. The findings provide implications for policymakers, investors, and managers. The results suggest that intangible assets can improve the value relevance in emerging markets, such as GCC, as the need to organize the requirements of information disclosures on intangible assets and provide great transparency and additional disclosure of information about intangible assets and their components.
Journal of the Korea Academia-Industrial cooperation Society
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v.10
no.4
/
pp.877-886
/
2009
Since 1982, the auditee have selected the auditor under market mechanism. Under the system on which the auditor have been chosen by client, there have been chances for opinion shopping, etc. To prevent those, some audit regulations have been introduced. Prior studies have documented the positive effect of these audit regulations. Those studies, however, had some limitations which they dealt with just short event period for empirical tests. This study examines the effect of Auditor Turnover Ratio on the Quality of Earnings using a sample of firms that were listed on Korea Exchange(KRX) from 1995 to 2004. The firms that change auditor frequently are expected to have low disclosure quality. The CEO with the incentives to manage or manipulate earnings could accomplish this purpose by replacing existing auditor with more friendly auditor, which could result in eventually lowering earning's quality of the firm. The result of empirical test shows that the accrual quality of firms which have high auditor turnover ratio are significantly lower than those of firms which have low ratio. This result is consistent with our hypothesis that the more frequently a firm changes auditor, the lower the quality of earning is. This evidence might give the implication to policy-making supervisor.
International journal of advanced smart convergence
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v.8
no.3
/
pp.193-200
/
2019
Accruals-Quality(AQ) is an important proxy for evaluating the quality of accounting information disclosures. High-quality accounting information will provide high predictability and precision in the disclosure of earnings and will increase the response to stock prices. And high Accruals-Quality, such as mitigating heterogeneity in accounting information interpretation, provides information usefulness in capital markets. The purpose of this study is to suggest how AQ, which represents the quality of accounting information disclosure, is transformed into digitized data in real-time in combination with IT information technology and provided to financial analyst's information environment in real-time. And AQ is a framework for predictive analysis through big data log analysis system. This real-time information from AQ will help financial analysts to increase their activity and reduce information asymmetry. In addition, AQ, which is provided in real time through IT information technology, can be used as an important basis for decision-making by users of capital market information, and is expected to contribute in providing companies with incentives to voluntarily improve the quality of accounting information disclosure.
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