Financial Reform and Real Earnings Management in Korea

• In Event: Session D: International Accounting

Abstract

The Korean (Asian) financial crisis of 1997 brought a stricter reporting and enforcement environment to the Korean economy. The new reporting standards (that parallel those of IFRS and FASB) and increased reliance on managerial incentives, including stock options, resulted in changes in accounting choices and business decisions made by Korean managers. The research findings in the U.S. suggest that the managers have changed their earnings management strategies due to financial reforms in the U.S. We examined extant and changes in the earnings management practices of large Korean firms in the periods before and after the Korean financial reform. Further, we examined whether Korean managers have adopted real earnings management in the post-financial reform period because of increased potential costs associated with accruals management. Our results suggest that the use of discretionary accruals to smooth earnings has declined but real earnings management through adjusting production levels and discretionary expenses has increased during the post-financial reform period.

Authors

• Buryung Brian Lee, Prairie View A&M University

• Dong W. Kim, Jeju National University

• Vijay Vemuri, Prairie View A&M University