Jong-Hag Choi

Is Comprehensive Income Useful

With the International Accounting Standards Board (IASB) now considering the question, we examine 16 different definitions of income across three applications: information content, predictive ability and executive compensation contracting. Our results reveal that comprehensive income defined by FASB Statement 130 (NI130) dominates both traditional net income (NI) and fully comprehensive income (NIbroad) in explaining equity returns, but that NI dominates NI130 and NIbroad in explaining executive compensation. These findings are strikingly consistent with prior lobbying positions. In predictive ability, no definition clearly dominates. When income components are considered, NIbroad dominates in all three applications, thus lending support to the disclosure of comprehensive income components.

The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market Discussion of "The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market"

We investigate whether the financial riskiness of large US audit firm clienteles varied with the changing audit litigation liability environment during the period 1975-1999. Partitioning the period of study into four distinct periods [a benchmark period (1975-1984), a period of increasing concerns about litigation liability (1985-1989), a period of lobbying for reform (1990-1994) and a post-relief period (1995-1999)], we find some evidence of risk decreases during 1985-1989, strong evidence of risk decreases during 1990-1994 and strong evidence of risk increases during 1995-1999. However, we also find that over the period of our study, a time during which Big Six market shares grew appreciably, the proportion of litigious-industry clients in Big Six client portfolios grew at about the same rate as the proportion of such clients in the population. Moreover, the Big Six share of the financially riskiest clients in the economy did not grow as fast as overall Big Six market share. In sum, while our evidence is consistent with the hypothesis that the riskiness of Big Six client portfolios responded to changes in the audit litigation liability environment, we find no systematic evidence of a race to the bottom or bottom fishing by these firms in a bid to increase their market shares.

Separation of corporate ownership and control and accounting conservatism: evidence from Korea

This study analyzes how the separation of corporate ownership and control affects financial reporting conservatism using unique data on Korean chaebol-affiliated firms. The presence of severe agency problems generated by the wedge between ownership and control may increase the demand for conservatism, while the greater managerial motivation and latitude in making accounting choices borne by the entrenchment problems can adversely affect the degree of financial reporting conservatism. We find that the ownership-control wedge is negatively associated with various proxies for conservatism, consistent with the entrenchment argument. Additional analyses reveal that a wide divergence between ownership and control adversely affects the corporate governance of a firm. Further, we find that the negative effects of the ownership-control wedge on conservatism are particularly strong for firms with weak corporate governance. Overall, we provide evidence that controlling shareholders act as a mechanism to mitigate the role of corporate governance, thus reducing implementation of conservatism.

Firm location and earnings management: Korean evidence

Using 7245 firm-year observations from Korean listed companies over 2000–2004, we find that firms located in Seoul (the capital city of Korea) or its surrounding metropolitan area (i.e. urban areas) are more likely to manage earnings than firms located in other areas (i.e. rural areas). Discretionary accruals are larger for urban firms than rural firms after controlling for variables that affect the level of accruals. Our findings suggest that due to greater attention from large numbers of investors and other market participants, urban firms face greater pressure to manipulate earnings to satisfy market expectations. However, we fail to find evidence of an association between firm location and increased earnings management for firms audited by Big 4 auditors or firms followed by analysts, which are likely to be more closely monitored by investors and other market participants. These findings are robust in various sensitivity analyses.

Financial Statement Comparability and the Informativeness of Stock Prices About Future Earnings

We find that financial statement comparability enhances the ability of current period returns to reflect future earnings, as measured by the future earnings response coefficient (FERC). Thus, comparability improves the informativeness of stock prices and allows investors to better anticipate future firm performance. In addition, using both the FERC and stock price synchronicity tests, we find that comparability increases the amount of firm-specific information (rather than market / industry-level information) reflected in stock prices. Moreover, analysts play an important role in improving the ability of stock prices to incorporate firm-specific information because they produce more firm-specific information when comparability is higher.

Audit market concentration and audit fees: an international investigation

Several large auditor consolidations in the late 1980s-early 1990s, along with Arthur Andersen’s collapse in 2001, facilitated global audit market concentration. Subsequently, regulators have expressed serious concern over the potential detrimental effects of this concentration, including cartel pricing. This study investigates the association between audit market concentration and audit fees. Using a large sample from 17 countries, our study yields three principal findings. First, consistent with regulators’ concern, a significantly positive association exists between market concentration and fees. Second, the country-level legal regime changes this association dramatically: while significant and positive in countries with a weak legal regime, the association weakens and eventually becomes negative as the legal regime strengthens. Third, these associations are more pronounced among clients of non-Big 4 auditors than those of Big 4 auditors. These findings provide regulators and other stakeholders with important insights into the effects of audit market structure on audit pricing.

Did the 1998 Merger of Price Waterhouse and Coopers & Lybrand Increase Audit Quality?

Prior research on the audit quality effects of Big N audit firm mergers is sparse. In this study, we examine the effects of the 1998 merger of Price Waterhouse (PW) and Coopers & Lybrand (CL) on the audit quality of PricewaterhouseCoopers (PwC) at both the firm- and the local office-levels, where audit quality is surrogated by the auditor’s propensity to issue a going concern opinion and the client’s discretionary accruals and accruals quality. At the firm-level, we find only weak evidence of an increase in audit quality for the merged firm (PwC) relative to the audit quality of the pre-merger component firms (PW and CL). At the office-level, we find stronger evidence of an increase in audit quality following the merger but only at the firm’s overlapping local offices, i.e., PwC offices in cities where both PW and CL had separate offices prior to the merger. Following the merger, these overlapping offices immediately increased in size as a result of merging the pre-existing (but separate) PW and CL local offices. Overall, the evidence suggests that Big N mergers increase audit quality only to the extent that there is an increase in office size.