The Effect of Substantial Investigation System of Delisting on Reliability of Accounting Information
Asian Tax Journal Vol. 11 No. 4 (2010), pp. 253-274
Abstract
The Korea Exchange have implemented a new delisting system called "Substantial Investigation System of Delisting" at February 2009. The main purpose of the system is improvement of the market confidence. The new system focuses on substantial suitability as a listed company by means of substantial investigation. The Substantial Investigation Committee evaluates a listing suitability such as continuity of corporate management, transparency, financial information and business status, as well as existing formal delisting standards. According to guidelines for substantial investigation, the listed companies which are detected accounting fraud are subject to investigation of delisting automatically. Therefore, the implementation of new system would influence reliability and transparency of accounting information. It is because enhanced delisting criteria would reduce the chance of discretional earnings management. We searched how many listed companies have been a subject of the investigation since implementation of new system, and compare with the previous status of delisting before 2009. We also examined empirically the effect of substantial investigation system of delisting on earnings management of listed companies. We performed empirical tests using 7,721 firm－year samples from 2004 to 2009. The measurements of earnings management for empirical tests are discretional accruals based on Dechow et al.(1995). Our results show that income management measured by discretional accruals is decreased after implementation of new system compared with previous delisting system. This finding is stronger for listed companies on KOSDAQ market, which have relatively low quality of accounting information, than KOSPI companies. This study could provide empirical evidence that implementation of substantial investigation system of delisting influences reliability of accounting information positively. It could justify tightening up substantial investigation system.
Keywords
- Substantial investigation system of delisting
- Earnings management
- Reliability of accounting information
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