적자회피 및 이익감소회피 이익조정과 타인자본비용: 비상장기업의 실증적 증거 = Research Articles : Earnings Management to Avoid Losses and Earnings Decreases, and the Cost of Debt: Some Empirical Evidence on Non-listed Firm

다국어 초록 (Multilingual Abstract)

This study examines how the earnings management behavior of nonlisted firms affects the level of firms` cost of debt. More specifically we investigate whether the creditors price when the borrowers report the small positive earnings or the small earnings increases as identified in Burgstahler and Dichev (B&D, 1997). B&D document that firms manage their reported earnings to avoid the earnings decreases or the losses, thus increasing the incidence of producing the small earnings increases and the small positive earnings. The purpose of this study is to reexamine the earnings management perspective of B&D targeting the non-listed firms in the debt market in Korea. We explore whether the creditors penalize the non-listed firms reporting the small earnings increases and the small earnings, thus increasing the costs of debt. In addition, we compare the two groups: the firms having small positive earnings and the firms having small earnings increases, and test whether there are any significant differences in the effect on the levels of cost of debt between the two different earnings management area. Following the prior studies (e.g., Jiang 2008, etc.), we employ the average interest rates and the average spread of interest rates as proxies for the cost of debt. As B&D show the cross-sectional discontinuity of earnings distribution around zero, we identify the regions with small earnings increases and small positive earnings. This study uses the total 40,362 firm-year observations for the period from 2004 to 2009. Our empirical results present the evidence that when the firms reporting small positive earnings and small earnings increases show significantly higher cost of debt respectively, than firms not falling into the regions, after controlling for other correlated variables. It suggests that creditors perceive that firms report the small positive earnings in order to avoid losses and the small earnings increases to avoid earnings decreases. In other words, when firms report the B&D`s earnings regions the creditors regard it as a result of managers` opportunistic behavior, and thus penalize by increasing the costs of debt. This OLS results are qualitatively similar to the results under the Newey and West (1984)`s test controlling for the heteroskedasticity and auto-correlation problems as well as the clustering methodology to control for time-series dependency. Despite the robustness, however, when fixed effects are considered, the results of non-listed firms with small earnings increase show not significant but those of firms with small positive earnings are still significant. Furthermore, we find that the firms reporting small positive earnings to avoid losses show significantly higher cost of debt effect than the firms reporting small earnings increases to avoid earnings decreases. It implies that creditors are more concerned about the firms reporting losses than the firms reporting negative earnings changes, and thus more severely penalize the firms reporting the small positive earnings to avoid losses than the firms reporting small earnings increases to avoid earnings decrease. In other words, creditors value more highly information risk of firms reporting small positive earnings than firms reporting small earnings increase. In sum, we conclude that the earnings management regions identified in the crosssectional discontinuity of earnings distribution around zero presented by B&D have negative impact on the non-listed firms` costs of debt compared to the firms not falling into the regions. Creditors believe that earnings in the two regions are manipulated due to the managers` opportunism rather than earnings are highly realizable in the future. Thus, creditors impose a penalty rather than give a reward in terms of the costs of borrowings. In this regard, our findings suggest that although the firms opportunistically manage earnings in order to report positive earnings and earnings changes and thus anticipate any other substantial benefits from the earnings management behavior, it is highly probable that they rather suffer from the increases in the cost of debts. On the other hand, the debt market perceives the firms reporting small positive earnings or earnings changes as those which manipulate earnings to avoid losses and earnings decreases. This study contributes to the extant literature in several ways. First, it is the first study to examine the earnings management behaviors identified by B&D (1997) of the non-listed firms, more specifically the effect of earnings management regions of B&D on the level of cost of debt. There exist not many prior studies regarding the non-listed private firms in Korea despite the relative importance of non-listed firms in the capital market in Korea. Second, this study tests the efficiency hypothesis in the debt market as a joint hypothesis. It is notable that the earnings management behavior of non-listed firms documented in this study is likely to adversely affect the efficient resource allocation in the capital market. Thus, our findings provide a crucial insight to various stakeholders of non-listed firms in Korea, such as managers, banks, financial analysts, auditors, government etc., in the sense that the earnings management behaviors of non-listed firms identified by B&D are priced in the private debt market.

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