ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Managers' Earnings Management in the Fourth Quarter and Corporate Governance

  • Jae Seung Kim Department of Tax and Accounting, Bucheon University

Asian Tax Journal Vol. 14 No. 3 (2013), pp. 217-252

Abstract

This study investigates managers' earnings management in the fourth quarter when facing the cumulative returns in the third quarter. It is also analyzed whether corporate governance can prevent managers from managing earnings in the fourth quarter. For this, we select firms as potentially income-increasing earnings managements that attained cumulative profit in the fourth quarter despite suffering cumulative loss until the prior quarter, and also include firms as income-decreasing earnings managements that cumulative gains in the third quarter exceeds the previous net-annual profit. Next, we make an analysis whether annual earnings are based on reliable reported earning or not, as well as whether annual earings are influenced by managers' earnings managements. Finally, we make an empirical investigation on whether foreign investors, outside directors, and large auditors play an effective role in monitoring opportunistic earnings management. 5,556 firms listed on the securities market and KOSDAQ from 2003 to 2010 are employed in this study, and the empirical results are as follows. First, it is shown that managers are highly likely to engage in earnings management in the fourth quarter who have incentives to manage earnings depending on third-quarter's cumulative returns. Second, contrary to the popular belief, it is revealed that the effect of the percentage of foreign investors and outside directors on enhancing corporate governance is not effective. That is, they fail to play an effective role in monitoring managers' fourth-quarter earnings management. Yet, it is proved that large auditors play a partial role in monitoring income-increasing earnings management. The result of this study can be expected to provide investors and financial analysts with useful information on investment decision, auditors with the need to audit potentially earnings management firms, and government with policy implications by reexamining outside director system in enhancing corporate governance.

Keywords

  • Earnings Management
  • Corporate Governance
  • Foreign Investor
  • Outside Director
  • Auditor

Related Articles

ATJ
E-SubmissionSitemapContact Us RSS

Asian Tax Journal

Address : 3F, KICPA Bldg., 12 Chungjeongro 7-gil, Seodaemun-gu, Seoul 03736, Republic of Korea

Editor-in-Chief : Prof. Wanyong Kim Editorial Office : Dept. of Finance, Accounting & Taxation, Hanyang Cyber University, 220 Wangsimni-ro, Seongdong-gu, Seoul, Republic of Korea Tel : +82-2-2290-0418 / +82-10-8664-1117 E-mail : taxresearch2@hanmail.net