ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Effect of the Voluntary Earnings Forecasts Disclosure on the Earnings Management

  • Jinsoo Han Kookmin University

Asian Tax Journal Vol. 15 No. 5 (2014), pp. 263-291

Abstract

This study empirically examines if the‘fair disclosure system’affects positively on the earningsmanagement by analyzing difference of earnings management pattern between the forecastsdisclosure firms and the non－forecasts disclosure firms. The sample consists of firms listed onKorean Stock Exchange from 2002 to 2011. And the fair disclosure system was taken effect inthis period. We divided the sample into forecast disclosure firms(issuing annual earnings forecast disclosureat least once for 10 years) and non－forecasts disclosure firms. And we also tested if there is anydifference between forecasts disclosure firms and non－forecasts disclosure firms in the level ofearnings management. Earnings management was measured by Real Activity EarningsManagement(RM) and Accruals based Earnings Management(AM). Furthermore, this paperinvestigates the effect of forecasts disclosure year and forecasts disclosure frequency on theearnings management pattern(RM and AM). The empirical results show that the forecasts disclosure firms exhibit lower RM than the nonforecastsdisclosure firms significantly. But there is no difference in AM level between the twogroups. And the results show that RM is relatively low and AM is high in both case of forecasts－disclosure－year and high－disclosure－frequency firm. It is generally accepted that RM affects negatively on the long－term value of firms. Consideringthis point of view about RM, it seems that our results support the fair disclosure system. Becausethe fair disclosure system induces firms disclose information voluntarily and minimize RM whichis negative device about earnings management. And that system induces forecasts disclosure firmsprefer to use AM(less negative device about earnings management) when they want to manageearnings.

Keywords

  • fair disclosure system
  • voluntary disclosure
  • earnings management
  • discretionary accruals
  • real activity earnings management

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