Hyungjin Cho

The Effectiveness of Regulation Fair Disclosure: Evidence from an Emerging Market

ABSTRACT The effect of corporate disclosure in emerging markets is not clearly predictable because of the prevalent information leakage prior to disclosure. We empirically examine the effectiveness of Regulation Fair Disclosure (Reg FD) in reducing information asymmetry among equity traders in an emerging market. Specifically, we test whether fair disclosure activity is negatively related to the probability of informed trading (PIN). Multivariate tests on a sample of listed companies in Korea subject to Reg FD reveal the following: (1) more frequent disclosure under Reg FD is related to lower information asymmetry, and (2) this relation differs across the types of disclosure, with the effect of qualitative disclosures on the PIN being weaker than that of quantitative disclosures. Evidence also indicates that the negative association between fair disclosure activities and information asymmetry is more (less) pronounced for firms with poorer (better) information environments where selective information leakage is more (less) likely. The results are robust to sensitivity tests. Our findings have implications for disclosure regulations in emerging markets, given that the existing literature casts doubt on the effectiveness of corporate disclosure in such markets.

Deleveraging and decline in revenue‐expense matching over time

Accounting rules mandate that the cost of debt should be recorded as an expense, while the cost of equity does not appear in the income statement. Therefore, the amount of financing expense, and thus net income, in the income statements depends on how firms finance their business. Based on a clear, substantial trend of declining leverage since the 1990s, we examine how changes in capital structure might influence earnings attributes—the matching between revenues and expenses. We find that the contemporaneous relation between revenues and interest expense in US firms has decreased from 1972 to 2013, a result of both changes in leverage and the declining explanatory power of interest expense with respect to revenues. When we construct the weighted average costs of capital based on the costs of both debt and equity, we find the contemporaneous relation between revenues and the costs of capital has not significantly changed. Our results indicate that differential accounting treatment of the costs of debt and equity can affect earnings attributes through change in capital structure.

The Shift in Corporate Credit Rating Standards: The Case of R&D Expenditure

This study contains exploratory examination on the change in the relation between corporate credit ratings and R&D expenses. Using U.S. firms with a credit rating from 1987 to 2013, we find that the negative relation between credit ratings and R&D expenditures in early periods has become weaker over time. The positive association between R&D expenditure and future performance is decreasing in recent periods, discarding the potential explanation on our finding that better R&D profitability would induce rating agencies to assess R&D expenditures more positively. This finding is also not explained by the change in sample composition and the recognition of intangible assets.

Regional Crime Rates and Reporting Quality: Evidence from Private Firms in London

Prior literature suggests that social norms influence corporate managers’ propensity to seek private rents, thereby being associated with financial reporting quality. Analyzing private firms headquartered in London, we examine whether borough-level crime rates are associated with financial reporting quality of the residing firms. Our findings indicate that firms in a borough with higher crime rates are more likely to get involved in accruals management and real activities management. We also find that firms in such boroughs tend to exhibit higher levels of tax avoidance. Our results imply that crime rates, an extreme form of social capital breakdown, affect managerial incentives to provide credible accounting information.

Optimistic credit rating and its influence on corporate decisions: evidence from Korea*

Abstract Credit rating agencies have often been a target for criticism due to their inaccuracy and untimeliness. This paper sheds light on this issue by examining how an optimistic credit rating influences corporate decisions. We use Korean corporate credit ratings and construct the measure of credit rating optimism as the deviation of the actual ratings from benchmark ratings based on US corporate ratings. We find that rating optimism has a negative association with cost of debt and a positive relation with debt financing and investment. We also find that a positive relation between investment and future performance is weaker for firms with optimistic ratings. This finding suggests that inaccurate credit ratings would damage efficient capital allocation in the capital market.

The Influence of Differential Treatment between the Costs of Debt and Equity on Earnings Attributes: Evidence from the Matching between Revenues and Expenses

Accounting rules mandate that the cost of debt should be recorded as an expense, while the cost of equity does not appear in the income statement. Therefore, the amount of financing expense, and thus net income, in the income statements depends on how firms finance their business. Based on a clear, substantial trend of declining leverage since the 1990s, we examine how changes in capital structure might influence earnings attributes—the matching between revenues and expenses. We find that the contemporaneous relation between revenues and interest expense in US firms has decreased from 1972 to 2013, a result of both changes in leverage and the declining explanatory power of interest expense with respect to revenues. When we construct the weighted average costs of capital based on the costs of both debt and equity, we find the contemporaneous relation between revenues and the costs of capital has not significantly changed. Our results indicate that differential accounting treatment of the costs of debt and equity can affect earnings attributes through change in capital structure.