ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

An Empirical Study on the Influence of the Discretionary Accruals on Firm Values

  • Lee Won Heum Hongik University
  • Choi Sumi Chungnam National University

Asian Tax Journal Vol. 7 No. 1 (2006), pp. 51-70

Abstract

Lee, Won Heum*Choi, Sumi**In this study, we develop a firm valuation model under earnings' manipulation, and three hypotheses related with the influence of discretionary accruals on the firm values are tested. The tests are performed based upon the firm-level data between 1994 and 2004 focusing on the manufacturing companies of the Korea Stock Exchange. Results are summarized as follows: First, the hypothesis that the positive(+) discretionary accruals will have a negative(-) effects on the firm values is rejected during the test period. Second, in case of the low-ROE firms which seem to barely avoid reporting losses, small positive(+) accruals added to the current earnings are turned out to have a positive(+) effect on the firm values. Meanwhile, the large amount of discretionary accruals in firms with same conditions don't make a significant effect on the firm values. Third, however, the hGigh-ROE and low-discretionary accruals samples show that the discretionary accruals have a positive effect on the firm values. In conclusion, these findings using the firm valuation model under earnings' manipulation reveal that the discretionary accruals do not generally damage the firm values. On the contrary, the discretionary accruals have a positive explanatory power in firm valuation in case of companies with the small earnings / low-discretionary accruals, and also have a positive influence on the firm value for the high - earings / low - discretionary accruals companies.攀 * Assistant Professor of Hongik University

Keywords

  • discretionary accruals
  • firm valuation
  • Ohlson's model

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