Abstract

The study investigates whether the firms subject to the enforcement actions (GAAP violators) change their debt-equity financing policies, debt financing sources, and debt maturity after their violations of are made public by accounting enforcement actions. In addition, this study incorporates the possibility that the characteristics of GAAP violations and resulting market reactions are different across GAAP violator’ listing status (KSE-listed, KSQ-listed, and unlisted firms). The empirical findings show that the enforcement actions affect GAAP violators' choice of external financing sources. GAAP violators are more likely to issue equity as opposed to debt after they are detected by the FSS. The decrease in debt financing is attributable to private debt (ex. Bank loan) rather than public debt (ex. Bond issuance). However, I fail to find the difference in debt maturity and change in financing from banks and non-bank private loan. In contrast, the subsample analyses show that the effect of enforcement actions on financing decisions is different across listing status of firm. For the firms listed in Korea Stock Exchange (KSE), I find a increase in debt financing and a decrease in equity financing after enforcement actions. These results are opposite to the findings in total sample analyses. I also find a significant increase in bond and bank loan after enforcement actions. For the firms listed in Korea Securities Dealers Automated Quotation (KSQ), I find that GAAP violators increase equity financing and reduce debt financing. The decrease in debt financing is due to private debt. These results are similar to findings in total sample analyses. For unlisted firms, I do not find any evidence on change in financing policies after enforcement actions. These results hold even after controlling for conventional leverage factors (size, tangibility, growth, profitability). Overall, the evidence suggests that accounting enforcement actions are effective and capital market participants react to the enforcement actions. However, the reactions to enforcement actions are different across capital market.

Keywords

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

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