• The Journal of Information Technology
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• v.5 no.1
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• pp.79-98
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• 2002

This study examines the association between valuation and accrual information. According to accounting based valuation model, firm's value consists of net book value and abnormal earnings. Net book value and abnormal earnings are determined as the manager's accounting policy. Discretionary accruals may signal the manager's value expectation or be noisy factor of accounting variables. The results of this study are as follows; First discretionary accruals are associated to stock prices negatively but non-discretionary accruals are not to stock prices. This result suggests that discretionary accruals and non-discretionary accruals are the differential factors of the firm value. Second, the product term of discretionary accrual and net book value are associated to the stock price negatively but the product term of non-discretionary accrual and net book value are not associated to the stock price. the results indicate that discretionary accruals are noisy factors of net book value information. Third, the product term of discretionary accrual and net income are associated to the stock price negatively and the product tenn of non-discretionary accrual and net income are also associated to the stock price negatively, the results suggest that discretionary accruals are noisy factors of earnings.

• Journal of Distribution Science
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• v.17 no.4
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• pp.5-16
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• 2019

Purpose - This study examines whether price cartel firms perform downward earnings management to avoid or minimize penalty surcharges levied by the Korea Fair Trade Commission and analyzes such earnings management in distribution industry. Research design, data, and methodology - We use 247 firms from 64 price cartel cases in the period of 2011-2016, and collect data from 3 years before to 3 years after the start of price cartel. Earnings management is measured by discretionary accruals. Three discretionary accrual estimation models are employed; modified Jones model, ROA adjusted modified Jones model and CFO-adjusted modified Jones model. For pre- and post-cartel periods, one year, two year, and three year windows are used. Additional empirical analyses are performed for distribution industry sub-sample of 25 cartel firms. Result - The regression results show that cartel firms' discretionary accruals are significantly lower in the period after the start of price cartel than before. And discretionary accruals are lower in cartel firms than in non-cartel firms during the cartel period. Cartel firms in distribution industry also show the earnings management similar to those in other industries. Conclusions - These two findings lead to the conjecture that managers of cartel firms manage their earnings downward. This behavior is indistinguishable between firms in distribution industry and other industries.

• Journal of Distribution Science
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• v.17 no.9
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• pp.103-115
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• 2019

Purpose - We attempted to verify the level of ethics of firms achieving sustainable management from the aspect of reliability of accounting information. Specifically, we evaluated the effects of sustainable management on accruals-based earning management (AEM) and real earning management (REM). Research design, data, and methodology - We employed the issuance of sustainability reports in addition to the indices of social responsibility and environmental-management evaluation of the Korea Corporate Governance Service in order to measure sustainability management. AEM was measured using discretionary accruals and calculated using the operant Jones model. Specifically, REM was measured using the methodology suggested by prior studies. The sample of our study consisted of 1,418 years of public listed firms in the Korea Stock Exchange from 2015 to 2017. Results - First, the level of AEM in firms achieving sustainable management was lower than the other. Second, the level of REM in these firms was lower than the other. Nonetheless, another analysis showed that the level of governance control affects the level of earning management and that the levels of AEM and REM were generally lower in firms achieving sustainable management than the others. Conclusions - We expected that firms achieving external ethics tend to have a higher level of internal ethics than others.

• Asia-Pacific Journal of Business
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• v.10 no.4
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• pp.31-47
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• 2019

The recently revised Act on External Audit has taken effect as of November 2018, where standard audit hour rule is included to enhance the audit quality requiring appropriate audit hour input. It has two issues, one is how much the standard audit hours should be and the other is how to control the auditor proficiency between positions when deciding standard audit hours. This paper focuses on the latter issue and studies if auditor proficiency measured with the KICPA position proficiency weight is economically meaningful and has audit quality implication. The KICPA proficiency weights of partner and junior CPA are 1.2, and 0.4 with senior CPA being 1. The results are as follows. First, we find that the audit proficiency decreases discretionary accruals, the proxy of audit quality. Second, the degree to which the audit proficiency decreases discretionary accruals is pronounced with non-big4 firm. The results imply that the KICPA position proficiency weight reflects auditor experiences which help to improve audit quality.

• Journal of Digital Convergence
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• v.19 no.5
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• pp.241-247
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• 2021

This study analyzed the changes in explanatory power of the modified Jones model(1995) for estimating the amount of accruals for Korean Stock Market listed companies from 1990 to 2019. We hypothesized that if the properties of financial variables used in the existing model change over time or change in discretionary ratios, the model's explanatory power will change. As the result of regression models, I found that the explanatory power of the modified Jones model(1995) gradually declined over time. The results may be derived from the increase in accruals itself and the changes in the distribution of variables contained in the model. The results of this research's chronological approach are expected to give important implications to both academic researchers and accounting information users.

• Management & Information Systems Review
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• v.35 no.4
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• pp.169-184
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• 2016

Deferred tax assets (liability) in a company's financial statements are to reflect the temporary difference between taxable income and accounting income and therefore can provide useful information as a proxy for discretionary accruals. In addition, deferred tax assets allow a company to manage its earnings by reviewing the feasibility of the assets' recognition. As such, this study focused on deferred tax assets to examine their relationship with discretionary accruals, which were measured by a modified Jones model (Dechow et al. 1995), and investigated the impact of audit quality on this relationship. In order to control for the effects of tax rate change and measurement credibility, deferred tax assets of 2,670 non-financial firms from 2009 to 2010 were collected as samples for the study. The results of the empirical analysis are as follows. First, the samples as a whole indicated that deferred tax assets have a negative relationship with discretionary accruals in a general sense, but a high-quality audit did not reveal a significant relationship between them. Second, the 1,379 samples with negative discretionary accruals did not reveal a significant relationship between deferred tax assets and discretionary accruals; however, the result showed a significant negative relationship under a high-quality audit. These findings suggest that in the case of negative discretionary accruals, a high-quality audit restricts an earnings management technique that utilizes deferred tax assets and that the assets can be a useful tool for detecting discretionary accruals. The present study is meaningful in that, unlike previous research, it combined the two contrasting roles of deferred tax assets-that of an earnings management detector and an earnings management tool-to examine their general relationship. The study also suggested that audit quality could influence the usefulness of deferred tax assets in providing information on discretionary accruals.

• Management & Information Systems Review
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• v.28 no.3
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• pp.69-98
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• 2009

This study investigates in-sample and out-of-sample predictive abilities of accruals and accruals components with respect to future cash flows using models developed by Barth et al.(2001). In tests, data collected fromda62 Korean KOSPI and KOSDAQ listed firms for ccr4-2007 are used. Results of in-sample prediction tests are similar with those of Barth et al.(2001). Their accrual components model is better than other three models(NI only model, CF only model and NI-total accruals model) in future cash flows predictive ability. That is, in the case of in-sample prediction, accrual components excluding amortization have additional information contents for future cash flows. But in out-of-sample tests, the results are different. The model including operational cash flows(CF only model) shows best out-of-sample predictive ability with respect to future cash flows among above four prediction models. The accrual components model of Barth et al.(2001) has worst out-of-sample predictive ability. The results are robust to sensitivity analyses. In conclusion, we can't find the evidence that accruals and accrual components have predictive ability with respect to future cash flows in out-of-sample prediction tests. This results are consistent with results of Lev et al.(2005), and inconsistent with the belief of accounting standards formulating organizations such as FASB and KASB.

• Journal of the Korea Academia-Industrial cooperation Society
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• v.20 no.6
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• pp.483-488
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• 2019

This study first examines whether the high matching principle reduces the cost of equity, and then examines the effect on discretionary accruals and capital cost. According to previous studies, the higher the response to revenue cost, the higher the earnings quality. The higher the quality of earnings, the lower the information risk, and the lower the information risk, the lower the capital cost of enterprise. Discretionary accruals can play two roles in opposing each other. One is that managers use the discretionary accruals to provide private information about the future of the corporation to the market, thus enhancing the usefulness of the earnings. The other is that managers can use the discretionary accruals opportunistically to distort earnings and provide misinformed information to investors, thus reducing the usefulness of earnings. The results of this study represents that the higher the responding to the revenue cost, the less the cost of equity. In the case of firms with high revenue response, we examine whether discretionary accruals reduce the cost of equity capital. As a result of the study, the higher the responding to the revenue cost, the lower the cost of equity capital. Companies with higher matching principle have been shown to reduce their capital costs by using discretionary accruals.

• Journal of the Korea Convergence Society
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• v.8 no.5
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• pp.213-221
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• 2017

This study empirically investigates the relation between information quality measured by accruals quality and the KOSPI200 index rebalancing. The accruals quality is used for the proxy of information quality and is estimated by employing the Francis et al. (2005) model. The result shows that there is a statistically significant difference between additions group and deletions group. The average information quality of deletions group is substantially lower than that of additions group. In addition, the regression analysis shows that the relationship between accruals quality and a dummy variable for changes in the KOSPI200 index composition is negative and statistically significant. This result implies that additions to the KOSPI200 stock index improves information quality and relieves the information risk of firm which results in the amelioration of information asymmetry. On the other hand, deletions from the KOSPI200 index result in the deterioration of information quality. These results are consistent with Merton (1987).

• Journal of Digital Convergence
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• v.15 no.1
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• pp.129-141
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• 2017

This study analyzed and compared the accounting earnings quality after the adoption of K-IFRS, targeting the stock exchange-listed firms (KOSPI, KOSDAQ). The analysis first revealed that KOSPI had higher quality accruals, and better persistence and predictability of the reported earnings and cash flows, compared to KOSDAQ. Second, in both KOSPI and KOSDAQ, the predictability of future cash flow showed that the accounting earnings was better than the cash flows. Third, for the persistence and predictability of earnings associated with the degree of accruals, in KOSPI and KOSDAQ both all, groups with better accruals quality had greater persistence and predictability of earnings, and a better future cash flow predictability of accounting earnings.