Leverage, Corporate Governance, and Real Earnings Management: Evidence from the Korean Market

Ana Belen Tulcanaza-Prieto,Younghwan Lee 한국재무학회 2020 한국재무학회 학술대회 Vol.2020 No.08

This study examines how corporate governance (CG) and leverage affect real earnings management (REM) in non-financial firms listed on the Korea Composite Stock Price Index during 2003-2011 by employing corporate governance score (CGS) and total, short-term, and long-term debt ratios (i.e., leverage) as independent variables, and four REM metrics as dependent variables. We find a significant positive relationship between leverage and REM, while there is a negative effect of CG on real manipulations. We also find that firms with a high-level of CG are low-leverage firms, whose managers are less likely to conduct REM activities than those of firms with a low-level of CG. Moreover, our results reveal that CG moderates and weakens the relationship between leverage and REM. These findings are consistent with the controlling hypothesis, alignment of interest between managers and owners, and increase of the firm’s transparency and reliability, which are characteristics of firms with strong CG, whose managers reduce their opportunistic behavior and do not engage frequently in REM activities. Our study complements the literature by detecting the moderating effect of CG, which might be considered an effective mechanism to reduce and avoid REM activities.

Factors Associated with the Financial Performance of Commercial Firms in Ecuador

Ana Belen Tulcanaza Prieto,이용환 글로벌경영학회 2018 글로벌경영학회지 Vol.15 No.5

We examine factors of the financial performance of the Ecuadorian commercial firms during the period of 2011-2016. Using both return on assets and return on sales as proxy for firm performance, we found that firm performance is affected negatively by leverage while it is influenced positively by liquidity, inventory, and sales growth. Our results are mostly consistent with experience of other countries, specially the U.S., Russia, and Korea except inventory. The U.S. firms show a negative coefficient of inventory with the financial performance.(Tailab, M., 2014) One possible reason is that the data in the study is unlisted firms in Ecuatorian stock markets. The source of information is the Superintendence of Companies, Securities, and Insurances which is an Ecuadorian government institution. They allow the information of those unlisted firms be released only.

Does Cost Stickiness Affect Capital Structure? Evidence from Korea

Ana Belen Tulcanaza Prieto(아나 베렌 툴카자나 프리토),Jeong-Ho Koo(구정호),Younghwan Lee(이용환) 한국관리회계학회 2019 관리회계연구 Vol.19 No.2

[연구목적] 본 연구는 2010년부터 2017년까지 KOSPI에 상장한 비금융업을 대상으로 원가의 하방경직성이 자본구조에 미치는 영향을 검증한다. [연구방법] 종속변수로 부채비율, 단기부채비율, 장기부채비율을 자본구조의 대용치로 측정한다. 독립변수로 Weiss(2010)과 Homburg and Nasev(2008)의 모형을 차용하여 판매관리비의 하방경직성을 측정한다. 본 연구는 다중회귀분석을 이용하여 하방경직성과 자본구조 간의 관계를 분석한다. [연구결과] 첫째, 원가의 하방경직성이 높은 기업은 부채비율과 음의 관계를 갖는 것으로 나타났다. 하방경직성이 높은 기업일수록 단기부채비율에 미치는 영향이 장기부채비울에 미치는 영향 보다 더 큰 것으로 나타났다. 둘째, 원가의 하방경직성이 낮은 기업은 부채비율에 영향을 미치지 않는 것으로 나타났다. [연구의 시사점] 자본구조는 개별기업의 특정 요인에 의해서 영향을 받을 수 있다. 본 연구는 기존의 원가의 비대칭성 연구를 확장하여 판매관리비의 하방경직성의 정도에 따라 내부 자본구조가 영향을 받을 수 있음을 검증하였다는 점에서 의미가 있다. 즉, 경영자의 원가관련 의사결정으로 발생한 하방경직성이 자본구조에 영향을 미치는 주요 요인 중의 하나임을 의미한다. [Purpose] This study examines how the stickiness cost behavior might affect the capital structure in non-financial firms listed on the Korea Composite Stock Price Index (KOSPI) during the period of 2010-2017. [Methodology] This paper employed total, short-term and long-term debt ratios as dependent variables, and stickiness of SG&A expenses as an independent variable. The multiple linear regression analysis has been performed on the 1,266 firm-year observations. [Findings] We found a significant negative relationship between the asymmetrical behavior of cost and capital structure in firms with high-level of cost stickiness, whereas the influence of stickiness of SG&A on debt ratios is insignificant for companies with low-level of cost stickiness. In other words, when the stickiness of SG&A expenses increases by one unit, the debt ratio will decrease by 0.822 (Model 1) and 0.521 (Model 2) for Korean nonfinancial firms with high-level of cost stickiness. These findings are consistent with previous studies performed by Du, Liu, and Shen (2012), Mihov (2013), Kahl, Lunn, and Nilsson (2014), and Abu-Serdaneh (2014) showing that firms with higher fixed costs in their costs structure should borrow less debt. [Implications] To sum up, the capital structure in firms with high-level of cost stickiness is negatively influenced by the asymmetrical behavior of cost. This paper complements the literature of corporate finance and accounting cost stickiness literature since it incorporates the impact of degree of cost stickiness as an internal determinant on the capital structure and the firm’s financial policy. For future research, we suggest analyzing the effect of macroeconomic and industrial factors and include measures of leverage dispersion and industry concentration in our model.

Internal and External Determinants of Capital Structure in Large Korean Firms

Ana Belen Tulcanaza Prieto,이용환 사람과세계경영학회 2019 Global Business and Finance Review Vol.24 No.3

We examine the internal and external determinants of the capital structure of large Korean companies during the 2010-2017 period. Using total, short-term, and long-term debt ratios as proxies for capital structure, we found that both profitability and liquidity affect leverage negatively and significantly. These results are consistent with the experience of other nations, such as Malaysia, Pakistan, and Vietnam. We also show that both asset tangibility and firm size have a positive effect on long-term borrowings but a negative effect on short-term borrowings. These findings are aligned with observations from Pakistani and Vietnamese firms. The external determinants, however, show little statistical significance. Using an empirical approach simultaneously including both firm-specific and external determinants that influence the debt-equity choice for large companies listed on the Korea Exchange, our study complements the literature on corporate finance. For future research, we suggest including a dummy variable for structural changes (e.g. the world financial crisis) and measures of leverage dispersion and industry concentration to increase the power of the statistical models.

Determinants of Stock Market Performance: VAR and VECM Designs in Korea and Japan

Ana Belen Tulcanaza Prieto,Younghwan Lee 사람과세계경영학회 2019 Global Business and Finance Review Vol.24 No.4

We examine commodities and macroeconomic factors of the Korean’ and Japanese’ stock market performance during the period of 1993-2017. Using both Kospi and Nikkei 225 as proxy for stock market performance, we designed a Vector Error Correction Model (VECM) which integrates the econometric model in the short- and long-run. We found that the Korean and Japanese stock market reflects both macroeconomic variables and commodity prices on stock price indices. Our results reveal that each stock market index, GDP growth, inflation rate, interest rate, exchange rate, crude oil WTI price, and gold price perform a cointegration in the long-term, suggesting that Kospi and Nikkei 225 are corrected in -19.6% and -39.6% in each quarter, respectively. In addition, GDP growth, interest rate, exchange rate, oil price, and gold price affect the Kospi short-run performance, while GDP growth, interest rate, and gold price affect Nikkei 225 in the short-term. Using impulse-response function and the variance decomposition, we identified that the most significant impulse on each stock market index is its own shock, and its magnitude declines from the short- to the long-run. Our results are mostly consistent with the experience of other countries, especially Turkey and India, meaning the stock market index has been particularly affected by its own past prices. Our paper complements the literature of corporate finance by comparing the determinants of stock market performance of two Asian countries, including different robustness tests to explain the effect on Kospi and Nikkei 225 of each independent variable. For future research, the authors suggest to include a dummy variable for structural changes to increase the power of the model.

Leverage, Corporate Governance and Real Earnings Management: Evidence from Korean Market

Ana Belen Tulcanaza Prieto,이용환,구정호 사람과세계경영학회 2020 Global Business and Finance Review Vol.25 No.4

Purpose: This study examines how corporate governance (CG) and leverage simultaneously influence real earnings management (REM). Methodology: We employed CG score (CGS), total, short-term, and long-term debt ratios as independent variables, and REM metrics as dependent variables. We include ordinary least-squares (OLS) panel data regressions, residual test, and interaction analysis in our study. Findings: While a significant positive relationship existed between leverage and REM, CG had a negative effect on real manipulations. Our results from the interaction analysis and residual test show that CG is a key player in explaining the relationship between leverage and REM. We also find that firms with a low-level of CG were more likely to conduct REM activities than those with a high-level CG. Research limitations/implications: These results imply that the reduction in opportunistic behavior of managers in the presence of strong CG could decrease the leverage of firms and REM activities and improve the quality of their earnings. Moreover, shareholder rights and audit organizations were the prominent CG characteristics influencing REM activities, as they enforce additional monitoring of financial reporting quality and increase audit standards. CG strategies mitigate the corporate corruption scandals through the adoption of high-quality accounting and financial norms in reporting and management. Thus, executives decrease their incentives to conduct REM activities and leverage cannot be used freely as a mechanism to manipulate earnings, given firms’ leverage position is audited and reviewed by the financial committee in firms with strong CG. For future research, the authors suggest including the degree of leverage as a disaggregation sample and adding the degree of cost stickiness. Originality/value: Several s tudies have investigated e ither the relationship between ( 1) REM and leverage, or ( 2) REM and CG, including leverage as a control variable. Our study, extends this bilateral relationship to simultaneous relationship between leverage, CG, and REM. Moreover, we investigate the predominant CG characteristics that influence the association among leverage and REM. We conduct interaction analysis and residual effect to investigate if CG should be considered as a determinant variable in the recurrence of REM activities of managers. We include firms with high- and low- levels of CG to show which firms are leveraged.

Real Earnings Management and Firm V alue using Quarterly Financial Data: Evidence from Korea

Ana Belen Tulcanaza-Prieto,이영환 사람과세계경영학회 2022 Global Business and Finance Review Vol.27 No.1

Purpose: This study examines whether real earnings management (REM) affects firm value by introducing quarterly financial data in the Korean market. Design/methodology/approach: The study employed four REM metrics as independent variables, and Tobin's Q as dependent variable. Ordinary least-squares (OLS) panel data regressions were used. To control the endogeneity issue, the two-stage least square (2SLS) regression model was implemented in the analysis. Findings: A significant negative relationship between REM and firm value was found in suspicious firms, whereas no statistically significant relationship was found in non-suspicious firms. Findings revealed that the negative relationship tends to prevail for at least two consecutive quarters. The result of 2SLS regression supports the previous findings that REM activities negatively affect firm value. Research limitations/implications: These results are consistent with the view that managers’ opportunistic behavior in terms of REM, may result in decreasing firm values. Mover, the REM effect reverberates not only in the current cash flow from operations (CFO) but also in the next period. Originality/value: Financial regulators need to review carefully the quarterly and annual financial statements to detect firms with relatively high REM activities because these temporarily increased or decreased real activities are underestimated or reversed in subsequent quarters, which reduces earnings sustainability or decreases the firms’ performance. The study suggests the implementation of a robust planning and financial-control system in firms to recognize and anticipate the earnings manipulations.