Conservatism and the Asymmetric Timeliness of Earnings in Korean Stock Market: Based on Board Composition (Conservatism and the Asymmetric Timeliness of Earnings in Korean Stock Market: Based on Board Composition)

서지정보

· 발행기관 : 한국증권학회
· 수록지 정보 : Asia-Pacific Journal of Financial Studies / 37권 / 5호 / 841 ~ 876페이지
· 저자명 : 김병호

초록

This study examines the association between earnings quality, measured by the timeliness of earnings recognition to the good and bad news, and the composition of the board of directors in the firms listed in Korea Stock Exchange. This study also compares the association between chaebol firms and non-chaebol firms to see if they are different in their outside directors’ influce on the timeliness of earnings recognition. Chaebols are usually perceived as family-controlled business groups in Korea, and one of the chaebols’ features is that the actual share of the controlling families is quite small. Accordingly, agency problems could be higher for chaebol firms.
The board plays an important role in the governance of large corporations. The board monitors and controls the behavior of top management, thereby protecting the interests of shareholders. Although the responsibilities of both inside and outside directors are the same in the Korean Security Laws, Korean Commercial Laws and other related regulations, the governance debate emphasizes more significant contribution outsider directors make in helping to ensure that managers act in the best interests of outside shareholders. This paper tests whether outside directors actually influence the financial reporting process, specifically, whether the timeliness in reported earnings varies with the composition of the board of directors in Korean firms. It is generally recognized that timeliness is one of the key elements in quality financial reporting.
Following Basu (1997), this study uses a reverse regression of earnings on shares return to investigate the timeliness in earnings recognition in both good and bad situations. If outsider directors improve earnings quality by mitigating management’s discretion to recognize good performance early and hide poor performance late, we can expect firms with relatively high proportion of outside directors to show a lower tendency to accelerate the speed at which good news is reflected in earnings and delay the speed in case of bad news. This study tests the prediction that the reporting of earnings is more timely in case of bad news for firms with a high proportion of outside directors. This study examines the association between the boards of directors and accounting conservatism using a sample of firms listed in Korea Stock Exchange with December year-end between 2001 and 2005. The empirical results indicate that the proportion of non-executive directors is associated with accounting quality as predicted. Specifically, for firms whose proportion of outside directors is above the sample median, this study finds evidence of increased earnings timeliness with respect to bad news, relative to firms whose board composition is below the median. In other words, earnings recognition for firms with below median levels of outsiders is less timely at reflecting bad news.
This study also examines the timeliness by dividing the sample firms into chaebol firms and non-chaebol firms. The chaebol families could exercise control over the whole business group while retaining only a small fraction of the equity claims on a company’s cash flow. It is expected that the controlling chaebol families could exercise their discretion over financial reporting in the interests of the families rather than in the interests of the majority of the voting shares. They would like to divert the firms’ resources from the major voting shareholders to themselves. In such situations, the independent director could play an important role in the financial reporting process so as to protect the majority shareholders. Accordingly, the secured independence of the boards could reduce the chaebol families’ discretions over the financial reporting process more effectively than in the case of non- chaebol firms. The result of this paper finds no significant differences between chaebol and non-chaebol in their reporting behaviors with respect to the board independence. The result could be due to the influence of chaebol families on the selection process of outside directors. Overall, the results of this study suggest that firms are likely to be more conservative when recognizing bad news in their earnings especially if they have more outside representation on their board. This is the case not only in non-chaebol firms but also in chaebol firms.
The contributions of this paper are as follows. First, this study provides evidence on the extent to which extant US findings can be generalized to a different governance and financial reporting regime by examining the association between board independence and earnings quality in a Korean setting. Second, this study finds that separating good and bad news is important to understand the way boards have impact on earnings timeliness. Finally, the results of this study suggest that greater outside board membership may be important in ensuring accounting quality, not only for the non-chaebol firms but also for the chaebol firms, thereby providing a rationale for the policy initiatives that have occurred over the past few years about the reform of the corporate governance structure.

영어초록

This study examines the association between earnings quality, measured by the timeliness of earnings recognition to the good and bad news, and the composition of the board of directors in the firms listed in Korea Stock Exchange. This study also compares the association between chaebol firms and non-chaebol firms to see if they are different in their outside directors’ influce on the timeliness of earnings recognition. Chaebols are usually perceived as family-controlled business groups in Korea, and one of the chaebols’ features is that the actual share of the controlling families is quite small. Accordingly, agency problems could be higher for chaebol firms.
The board plays an important role in the governance of large corporations. The board monitors and controls the behavior of top management, thereby protecting the interests of shareholders. Although the responsibilities of both inside and outside directors are the same in the Korean Security Laws, Korean Commercial Laws and other related regulations, the governance debate emphasizes more significant contribution outsider directors make in helping to ensure that managers act in the best interests of outside shareholders. This paper tests whether outside directors actually influence the financial reporting process, specifically, whether the timeliness in reported earnings varies with the composition of the board of directors in Korean firms. It is generally recognized that timeliness is one of the key elements in quality financial reporting.
Following Basu (1997), this study uses a reverse regression of earnings on shares return to investigate the timeliness in earnings recognition in both good and bad situations. If outsider directors improve earnings quality by mitigating management’s discretion to recognize good performance early and hide poor performance late, we can expect firms with relatively high proportion of outside directors to show a lower tendency to accelerate the speed at which good news is reflected in earnings and delay the speed in case of bad news. This study tests the prediction that the reporting of earnings is more timely in case of bad news for firms with a high proportion of outside directors. This study examines the association between the boards of directors and accounting conservatism using a sample of firms listed in Korea Stock Exchange with December year-end between 2001 and 2005. The empirical results indicate that the proportion of non-executive directors is associated with accounting quality as predicted. Specifically, for firms whose proportion of outside directors is above the sample median, this study finds evidence of increased earnings timeliness with respect to bad news, relative to firms whose board composition is below the median. In other words, earnings recognition for firms with below median levels of outsiders is less timely at reflecting bad news.
This study also examines the timeliness by dividing the sample firms into chaebol firms and non-chaebol firms. The chaebol families could exercise control over the whole business group while retaining only a small fraction of the equity claims on a company’s cash flow. It is expected that the controlling chaebol families could exercise their discretion over financial reporting in the interests of the families rather than in the interests of the majority of the voting shares. They would like to divert the firms’ resources from the major voting shareholders to themselves. In such situations, the independent director could play an important role in the financial reporting process so as to protect the majority shareholders. Accordingly, the secured independence of the boards could reduce the chaebol families’ discretions over the financial reporting process more effectively than in the case of non- chaebol firms. The result of this paper finds no significant differences between chaebol and non-chaebol in their reporting behaviors with respect to the board independence. The result could be due to the influence of chaebol families on the selection process of outside directors. Overall, the results of this study suggest that firms are likely to be more conservative when recognizing bad news in their earnings especially if they have more outside representation on their board. This is the case not only in non-chaebol firms but also in chaebol firms.
The contributions of this paper are as follows. First, this study provides evidence on the extent to which extant US findings can be generalized to a different governance and financial reporting regime by examining the association between board independence and earnings quality in a Korean setting. Second, this study finds that separating good and bad news is important to understand the way boards have impact on earnings timeliness. Finally, the results of this study suggest that greater outside board membership may be important in ensuring accounting quality, not only for the non-chaebol firms but also for the chaebol firms, thereby providing a rationale for the policy initiatives that have occurred over the past few years about the reform of the corporate governance structure.

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