ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Economic Consequences of Accounting Enforcement Actions

  • Park, Kyung-Ho Soongsil University
  • Roh, Hee Chun
  • Roh Soongsil University
  • Hee Chun

Asian Tax Journal Vol. 12 No. 2 (2011), pp. 135-173

Abstract

This paper provides a comprehensive analysis of financial misreporting investigated and disclosed by the FSS. In this essay, we examine whether the enforcement actions have economic consequences on the firm which is caught by regulators on committing GAAP violations. This research topic is motivated by a need to understand whether and how the enforcement actions by the FSS affect the firm economically and capital market both in the long－term and by firm’s listing status. To investigate these issues, we use various variables to proxy for economic consequences and add some debt－related variables. We also classify the sample firm－years into before and after years relative to violation year and detection year to examine the effects of enforcement actions in the long term. In addition, we separate the listed companies into two groups based on exchange listing, the firms listed in Korea Stock Exchange (hereafter, KSE) and the firms listed in the Korean Securities Dealers Automated Quotations (hereafter, KSQ) because the two groups are supposed to be different in terms of various firm characteristics such as size, profitability, and ownership structure. Empirical findings show that the effects of enforcement actions are different across listing status. In particular, KSQ－listed firms show more sensitive reactions to the enforcement actions than KSE－listed firms in most of analyses (short－term stock market reactions, firm performance, working capital, leverage, investment, discretionary accruals, forecast dispersion, bond maturity, and credit rating). In addition, debt market participants such as bondholders and rating agencies react to enforcement actions differently from stock market analyst and across listing status of firm. Overall, these findings suggest that distinguishing KSQ－listed firms from KSE－listed firms is important to understand the motivations for GAAP violations and the consequences of enforcement actions.

Keywords

  • GAAP violation
  • accounting enforcement actions
  • economic consequences
  • financing decisions
  • listing status

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