Abstract

This study provides three major empirical analyses. First, the paper analyzes the monitoring role of national pension blockholder on earnings management, such as discretionary accruals, abnormal cash flow from operations, abnormal production costs, and abnormal discretionary expenses. Second, this study examines the effect of national pension blockholder on the association between the cost of debt and earnings management. Third, I analyze whether the effects of national pension blockholder on the association between the cost of debt and earnings management are affected by controlling shareholder. The sample is obtained from firms listed on the Korea Exchange (KRX) from 2006 to 2014. I employ the total sample using 4,374 firm－year observations from the KIS－VALUE database. First, result of this study shows that the existence of national pension blockholder is negatively related to the magnitude of accrual－based and real earnings management. Second, this study demonstrates the positive relationship between accrual－based earnings management and debt capital cost is weakened, real earnings management is negatively related to the cost of debt, by considering the ability of national pension blockholder to reduce accrual－based and real earnings management. Third, such effects are weakened in firms with high controlling shareholders. This study is the first to verify whether debtholders can consider the ability of national pension to restrict earnings management. These results may prove useful in the plan of institutional improvement for shareholder activism, and the implications for capital market participants are significant.

Keywords

• National pension blockholder
• Shareholder activism
• Earnings management
• Debt capital cost

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