Abstract
This paper finds evidence that delisting firms make reported earnings more conservative to avoid litigation risk. Conservatism has been used as one of suitable reporting quality measurements that is separate from discretionary accruals, in that investors can monitor the firm’s contract efficiency or litigation risk by demanding conservatism. We collect a sample that is composed of 6348 listed non-financial companies for the period 2009–2016. Our results are as follows. First, we find that companies ahead of delisting are more conservative than other companies in Korean Securities Dealers Automated Quotations (KOSDAQ). Second, companies that are ahead of delisting whose auditor is non-big4 are significantly more conservative. Our results imply that companies that are in the process of delisting are seeking to increase their sustainability and to improve earnings quality, such as conservatism, and that small auditors are more conservative in order to mitigate the higher risk of litigation in comparison with big4 auditors. This study has a role to complement prior studies regarding delisting, and provides that the delisting institutions in KOSDAQ market can improve the efficiency and the reliability of the capital market.
Highlights
Korea launched the Korean Securities Dealers Automated Quotations (KOSDAQ) market mainly for small and medium-sized enterprises (SMEs) and venture companies to list and obtain financing
The size of KOSDAQ has expanded and more diverse stakeholders are becoming involved in the market, issues that are related to accounting transparency, including financial distress and accounting fraud, have beset a number of companies, as management circumvented internal control systems and damaged companies
Some of those companies have delisted, which has resulted in huge damage to investors on KOSDAQ and caused the external auditors of those companies to take responsibility for covering the damages. (Samil Pricewaterhouse Coopers, the largest accounting firm in Korea, paid KRW 11.4 billion and KRW 4.7 billion in damages to investors who suffered losses from its audit failure to detect accounting fraud by For Human and Sintec, which were subsequently delisted from KOSDAQ.)
Summary
Korea launched the Korean Securities Dealers Automated Quotations (KOSDAQ) market mainly for small and medium-sized enterprises (SMEs) and venture companies to list and obtain financing. The size of KOSDAQ has expanded and more diverse stakeholders are becoming involved in the market, issues that are related to accounting transparency, including financial distress and accounting fraud, have beset a number of companies, as management circumvented internal control systems and damaged companies. Once a company is listed, it need not be delisted, even if it suffers losses owing to accounting fraud or embezzlement, as long as it maintains its financial reporting values, such as sales, at certain levels To address this problem, the regulatory authorities in Korea introduced a substantial delisting investigation system from February 2009 to verify the qualitative criteria. There are some cases in Korea that even if they cease listing themselves.) managers tend to keep a company listed when the delisting risk rises, even by adjusting the accounting numbers, and this offers an important incentive for earnings management by the manager [5]
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