ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Relationship Between Manager’s Perquisite Consumption and Earnings Management

  • Choi Ung-Yong College of Business Administration, Chonnam National University

Asian Tax Journal Vol. 17 No. 1 (2016), pp. 89-123

Abstract

This study investigates whether manager’s perquisite consumption affects earnings management. We employ entertainment expenses as the proxies of perquisite consumption expenses. And Discretionary accruals(DA) are estimated by the Kothari et al.(2005) model. And similar to prior studies such as Roychowdhury(2006), Cohen et. al(2008), Cohen and Zarowin(2010), we adopt established proxies of real activity－based earnings management such as abnormal cash flow from operations (abCFO*(－1)), abnormal production costs(abProd), abnormal discretionary expenses (abEXP*(－1)). We draw an initial sample of firms listed on the Korean Stock Exchange over the period of 2006－2010. Our sample consists of 2,648 firm－years retrieved from the KIS－VALUE database which satisfy the following selection criteria：(1) fiscal year ending December 31, (2) non financial institutions, (3) availability of relevant financial data, and (4) firms under 1 of debt ratio. The main results from this study are as follows. First, we find that entertainment expense is positively associated with the magnitude of accruals－based earnings management (DA) and real earnings management, such as abCFO*(－1), abProd, abEXP*(－1). Second, in firms with an excessive entertainment expense, we find that the entertainment expense is positively associated with the DA, the abCFO*(－1). This study may confirm the direct relationship between manager’s perquisite consumption and earnings management. Above results from this study may prove particularly useful in the control plans of manager’s perquisite consumption.

Keywords

  • manager’s perquisite consumption
  • earnings management

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Asian Tax Journal

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