정보비대칭성에 따른 보수주의의 차별적 인식 = Differentiated Recognition of Conservatism Due to the Information Asymmetry

다국어 초록 (Multilingual Abstract)

Under conservative accounting, bad news is recognized immediately in the current period, thus most of the bad news is reflected upon the current income. Such conservative accounting brings about the undervaluation of the short-term return on investment, and, at the same time, comes to have the potential to report a better result of the firms in a long-term perspective. However, if information users do not recognize the conservative accounting from the information provider adequately, in other words, if they do not recognize the long and short-term effects of the conservative accounting, it may result in their undervaluing the conservative accounting. After all, in a situation where information asymmetry exists, a foreign investor who is in a preferential position for information may utilize the conservative accounting strategically by way of establishing an investment strategy of buying stocks undervalued by the short-term conservative accounting and selling overvalued stocks. Accordingly, this study firstly examines whether conservative accounting was followed by the decrease in the cost of capital(Hypothesis 1), and secondly, examines whether conservative accounting in the existence of an information asymmetry could cause an undervaluation in the stock market due to the poor recognition of the information users(Hypothesis 2) and finally, examines whether the information users in a relatively preferential position for information preferred conservative accounting in such an information asymmetry (Hypothesis 3). In order to test hypothesis 1, we estimated equation (2). The change in cost of capital was applied as a dependent variable(the change in year t+1 and year t of interest expense divided by the average of total short and long-term debt), and independent variables include conservative measurement of Penman and Zhang(2002) and other control variables. In order to test hypothesis 2, we observed annual performance of ahedge portfolio by dividing the measured value of conservative to quartile, and estimated equation (3). In equation (3), Size-adjusted returns of 1 year were used for the dependent variable while the regression method which included the conservative measurement of Penman and Zhang(2002) and other control variables were used for the independent variable. In this case, each independent variable was standardized into quartile and the standardized quartile was transformed to a ranking variable which has a value of 0 to 1. Last, We estimated equation (4) to test hypothesis 3. In equation (4), the quota rate of foreign investors was used for the dependent variable while a regression method which included conservative measurement and other control variables was used for the independent variable. The sample consists of non-banking 3,645 firm-years with December fiscal year listed over the Korean Stock Exchange for 1995-2004. The main empirical results of this study are as follows. First, as it is shown in Table 4 (regression results for the effect of conservatism on cost of capital), conservative accounting (CONS) has a significant negative relation with change in cost of capital(ΔCOC). This result suggests that investors require more risk premium as the level of conservatism decreases in the long term. Second, as it is reported in Table 5(annual performance of hedge portfolios), we find that size-adjusted return of hedge portfolio is 12.64%(t-value 3.75) which is a significant result at the 0.01 level. Third, in Table 6(regression statistics of the relation between abnormal return and conservatism quartile ranking after controlling other factors) which presents the result of estimating equation (3), the coefficient on CONSquartile is 0.1912 which is significant at the 0.01 level, supporting hypothesis 2. In other words, this result means that a zero-investment strategy on CONS variable earns an incremental abnormal return of 19.12%. Last, the rate of foreigner`s investment has a significant positive(+) relation with conservative accounting. It is shown in Table 7(regression results for the effect of conservatism on foreigner`s investment strategy). Through this result, it is possible to indirectly predict that the foreign investors seek for an investment strategy which considers both the long and short term-effects of conservative accounting by buying the stocks which are relatively underestimated through conservative accounting for a long-term benefit. The contribution of this study is that it gives an opportunity to reduce information asymmetry for information users in the future by clarifying that the recognition of conservative accounting is one of the factors that creates information asymmetry in the capital market. However, in order to accurately test the different recognition of each investor towards conservative accounting, an actual analysis about foreign investors as well as institute investors and individual investors is required. Consequently, the shortcoming of this study is that there was no actual analysis of institute investors and individual investors due to the problems related to data collection in reality.

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