Abstract
This paper examines the earnings management behavior of large, family-controlled business groups (so-called ‘chaebol’) in Korea from 2006 to 2010. Specifically, the author studies whether the methods of earnings management are different between chaebol firms versus non-chaebol firms. The author finds no significant difference in accrual-based earnings management by these two types of firms. However, the author shows that chaebol firms’ real-based earnings management is greater than non-chaebol firms, based on their higher abnormal production costs and lower abnormal discretionary expenses, in order to manipulate accounting income upward. The results suggest that owner-managed firms tend to choose real manipulation which negatively affects future corporate performance and consequently mislead investors about the firm value
Highlights
Related literature and hypothesesThis paper is closely related to two streams of literature. First, this paper adds to the earnings
This paper investigates whether owner-managed firms and agent-led firms have different means of earnings management
I find no difference in accrual-based earnings management, which is measured by discretionary accruals, between chaebol firms and non-chaebol firms
Summary
This paper is closely related to two streams of literature. First, this paper adds to the earnings. This paper attempts to examine whether owner-managed and agent-led firms have different incentives for such financial reporting behavior. Management entrenchment view argues that owner-manager is inclined to build the empire and maximize their private benefits by abusing corporate resources Based on such view, the agency conflict between controlling and minority shareholders is significant in chaebol firms. Companies manage earnings by changing real operating activities (Roychowdhury, 2006) Such real-based manipulation is measured by abnormal operating cash flows, abnormal discretionary expenses and abnormal production costs. Ownermanagers have a longer horizon than owner-managers do (Fama and Jensen, 1983) This implies that ownermanaged and agent-led companies could face very different trade-offs between accrual-based and realbased manipulation. The second hypothesis is stated as follows: H2: Chaebol and non-chaebol firms will have different means of earnings management
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