ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Information Asymmetry and Earnings Management

  • Jong-Il, Bae Daeshin Accounting Corporation

Asian Tax Journal Vol. 13 No. 2 (2012), pp. 141-172

Abstract

This study is to verify if there is any difference of information asymmetry between the management and the interested parties depending on the earnings management with the patterns of loss avoid and Big bath. For this, this study assumed "non discretionary net income(NDNI)" in two ways of adjusted Jones Model(Dechow et al, 1995) and performance matched discretionary accrual(Kothari et al. 2005), and classified the enterprises of earnings management and those of non－earnings management on the basis of the assumed NDNI. More concretely, categorized both the enterprises which carried out earnings management to avoid loss－reporting(non discretionary net income<0,reported net income>0) and those which reported the loss for the purpose of deferring earnings(non discretionary net income>0, reported net income<0) as the enterprises of earnings management, defining the enterprises which is positive both at non discretionary net income and at reported income as the enterprises of non－earnings management. Also, in order to secure the soundness of study results, I divided Information Asymmetry between the management and the interested parties into Standard deviation of daily relative return(SR), Standard deviation of absolute relative return(ASR) and Standard deviation of excess earning rate(AR) and went on with empirical analysis. Among the results of the empirical analysis, the first was that the enterprises of earnings management were observed to make significant positive(＋) effects on each of Standard deviation of daily relative return(SR), Standard deviation of absolute relative return(ASR) and Standard deviation of excess earning rate(AR) in all the cases assumed as Adjusted Jones Model and Performance matched Discretionary Accrual Model. Second, with the result of the analysis by classifying the enterprises of earnings management as Big bath, the Information Asymmetry of the enterprises was observed to be bigger than that of those of non－earnings management. Third, for the empirical analysis to find out whether there is any difference of information asymmetry between the enterprises of earnings management and those of non－earnings management, I classified both the enterprises which carried out earnings management to avoid loss－reporting and those of Big bath which reported loss even though they could have reported their surplus as earnings management enterprises, which result showed that the earnings management made a significant positive effects on the Information asymmetry between the management and the interested parties as in the result of the previous regression analysis. To sum up the empirical analysis, it was found out that the enterprises are making use of the information asymmetry between the management and the interested parties for earnings management and that this behavior of earnings management include not only the earnings management for avoiding lossreporting but also those of Big bath pattern for reporting loss in order to defer the net profit during the term even though they can report the net profit during the term. The previous studies have been focusing on the fact that the earnings management is related to the Positive and the information asymmetry between the management and the interested parties. That is, their focus was that as the information asymmetry between the two increases the behavior of earnings management by the management increases. However, this study may regraded very meaningful in that it distinguished earnings management by pattern into that for avoiding loss and that(Big bath) for deferring profit to verify the difference of information asymmetry between the management and the interested parties depending on the patterns of earnings management.

Keywords

  • information asymmetry
  • earnings management
  • loss avoid
  • Big bath
  • non discretionary net income

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Asian Tax Journal

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