Demand for fair value accounting: The case of the asset revaluation boom in Korea during the global financial crisis

When the fair value accounting (FVA) option for property, plant, and equipment was introduced in the midst of the global financial crisis, a significant proportion of Korean firms elected FVA. We attribute this unusual boom in asset revaluations to the nation's culture of government intervention and civilian compliance, which was particularly espoused during this period of financial turmoil, and a foreseeable option to switch back to historical cost accounting. We find that among those firms whose debt‐to‐equity ratios are low, public firms opt for the FVA option more often than private firms, suggesting that the need to communicate fair value information with diversified equity holders is more important than the need to do so with creditors. In contrast, among those firms whose debt‐to‐equity ratios are high enough to warrant such unfavorable dispositions as new debt freezes and monitoring by regulators, we find no difference in the FVA choice between private and public firms. These findings imply that during the global financial crisis, private firms that rely heavily on debt financing have a strong incentive to utilize FVA to comply with government guidelines for the debt‐to‐equity ratio and to ease a potential hold‐up problem by influential creditors.     

Do analysts who understand accounting conservatism exhibit better forecasting performance?

This study investigates the performance of analysts when they match the asymmetric timeliness of their earnings forecast revisions (i.e., asymmetric forecast timeliness) with the asymmetric timeliness of firms’ reported earnings (i.e., asymmetric earnings timeliness). We find that better timeliness‐matching analysts produce more accurate earnings forecasts and elicit stronger market reactions to their forecast revisions. Further, better timeliness‐matching analysts issue less biased earnings forecasts, more profitable stock recommendations and have more favorable career outcomes. Overall, our results indicate that analysts’ ability to incorporate conditional conservatism into their earnings forecasts is an important reflection of analyst expertise and professional success.     

Information Sharing in the Presence of Preemptive Incentives: Economic Consequences of Mandatory Disclosure

Thisstudy examines the welfare implications of a mandatory disclosurerequirement in an oligopolistic market, in which firms can choosetheir output either before or after the resolution of demanduncertainty. Two main results are derived. First, it is shownthat there exists a set of parameter values under which mandatorydisclosure is ineffective in the sense that it does not induceany change in the equilibrium production. Second, for some otherparameter values, imposing mandatory disclosure alters the firms'incentive structure in a way that gives rise to a Pareto lossin welfare; i.e., firms and consumers are made strictly worseoff. These two results suggest that the regulatory implicationsderived from the information-sharing literature should be interpretedwith caution.     

Unexpected Accruals and Conditional Accounting Conservatism

Abstract:  This paper examines the impact of management discretion over accruals on conditional accounting conservatism, defined as the tendency of accountants to recognize bad news on a timelier basis than good news. Prior research suggests that conditional accounting conservatism reflected in earnings is mainly due to the accrual component of earnings, not the cash flow component of earnings. After decomposing total accruals into expected and unexpected accruals, I find that (1) conditional accounting conservatism reflected in accruals is mainly due to unexpected accruals; (2) the negative association between unconditional and conditional accounting conservatism is mainly attributable to unexpected accruals; and (3) firms with higher leverage exhibit conditionally more conservative accounting primarily through unexpected accruals. These results are robust to accrual models that take into account the systematic association between accruals and cash flows and their non-linearity and to the asymmetric persistence of earnings changes specification of conditional accounting conservatism. Taken together, these results suggest that managers exercise their discretion over accruals to expedite the recognition of bad news rather than good news.     

Business Ethics and Financial Reporting Quality: Evidence from Korea

This study examines the relationship between corporate commitment to business ethics and financial reporting quality. We posit that companies with a higher level of ethical commitment exhibit better quality financial reporting than those with a lower level of ethical commitment. Consistent with our prediction, we find that companies with a higher level of ethical commitment are engaged in less earnings management, report earnings more conservatively, and predict future cash flows more accurately than those with a lower level of ethical commitment. We also find that corporate commitment to business ethics has perpetuating effects on future financial reporting quality.     

Corporate Governance,Commitment to Business Ethics,and Firm Valuation: Evidence from the Korean Stock Market

A variety of stakeholders have long been interested in the factors that are related to firm valuation. This article investigates why companies with more comprehensive corporate governance (CG) have a value premium over companies with less comprehensive CG. We posit and find that the cost of equity capital (COC) decreases with the strength of CG, suggesting that the value premium stems from the lower COC for more comprehensive CG. We also find that the COC is lower for companies with strong commitment to business ethics (BE) than for those with weak commitment to BE and that the beneficial effect of CG on the COC is more pronounced for companies with weak commitment to BE than for those with strong commitment to BE. Companies with more comprehensive CG tend to exhibit strong commitment to BE, but the beneficial effect of corporate ethical commitment is not completely subsumed by CG. Our results suggest that companies could lower their cost of equity capital and increase firm value by adopting more comprehensive CG practices and committing to higher standards of BE.     

Antecedents and consequences of the strategic orientations in new product development: The case of Chinese manufacturers

The objective of the present study is to advance the understanding of the role of the strategic orientation of the firm for successful new product development (NPD), in the context of Chinese manufacturing firms. Through field research accompanied by a review of the related literature, this study identifies customer orientation and technology orientation as crucial strategic components that are important to successful new product development. This research proposes a conceptual model of strategic orientations, in which firm-internal (organizational support) and -external (environmental turbulence) factors are expected to influence strategic orientations, which, in turn, impact NPD performance. The model is tested using data collected from a large-scale survey of 232 manufacturing firms in China. The results largely support the hypotheses derived from the conceptual model. First, organizational support and environmental turbulence have a positive influence on the implementation of strategic orientations. Second, the two strategic orientations show a different pattern of performance implications.     

Do Analysts Strategically Employ Cash Flow Forecast Revisions to Offset Negative Earnings Forecast Revisions?

We investigate whether analysts use cash flow forecasts to reduce the impact of earnings forecast revisions (EFRs) on market participants. In particular, we focus on conflict between an analyst's concurrent cash flow and earnings forecast revisions. We hypothesize and find that analysts are more likely to issue a positive cash flow forecast revision when they issue a negative earnings forecast revision concurrently, but not the opposite, particularly for Fortune 500 firms. Furthermore, our supplementary analyses suggest that (1) some analysts optimistically bias cash flow forecasts when they issue negative earnings forecast revisions; (2) the market pays less attention to the historical accuracy of analyst cash flow forecasts, so analysts have some latitude to present their cash flow forecasts in an optimistic way; and (3) the market reacts mainly to the direction, not the magnitude, of cash flow forecast revisions. Overall, these findings suggest that analysts may strategically use cash flow forecasts in conjunction with earnings forecasts to maintain good management relationships.     

Pension Funding Regulations and Actuarial Gains and Losses

With pervasive pension funding deficits, Korean firms have been under pressure to improve their funding levels. We examine whether firms have incentives to set obligation‐decreasing pension assumptions when they have large pension deficits (pension obligations in excess of plan assets) and when they make insufficient contributions to external pension funds. We find that firms report larger actuarial gains (or smaller actuarial losses) associated with the remeasurement of pension liabilities when their pension funding ratio (the ratio of the fair value of plan assets to defined benefit obligations) is lower and when contributions to plan assets relative to pension service costs are smaller. Next, upon the introduction of a minimum pension funding guideline, we find that the effect of the funding ratio and contributions to pension funds on actuarial gains and losses is more pronounced for firms whose funding ratios are slightly below the minimum funding ratio than it is for firms whose funding ratios exceed or fall short of the minimum by a large margin. Our results indicate that firms opportunistically exercise discretion regarding corporate pension accounting under International Financial Reporting Standards to comply with pension funding regulations, thereby reducing perceived pension deficits.