Kooyul Jung

Ownership structure and earnings informativeness: Evidence from Korea

Abstract This paper examines the relationship between corporate ownership structure in Korea and the informativeness of earnings. Korean ownership structure is characterized by the dominance of one primary owner who also participates in firm management. Existing literature offers two alternative perspectives on the behavior of such owner–manager firms, convergence of interests, and management entrenchment hypotheses. We tested the alternative views to see how they are reflected in earnings informativeness. The results show that earnings are more informative as holdings of the owner increase, supporting the convergence of interest explanation for the owner–manager structure. Second, we examine the role of institutional investors and blockholders. On the one hand, institutions/blockholders have incentives to actively monitor management. However, on the other hand, institutions/blockholders may not render effective monitoring because they lack expertise, suffer from freerider problems, or strategically ally with management. These opposing views predict conflicting signs on the relation between the earnings informativeness and holdings of institutions/blockholders. We find that earnings informativeness increases with the holdings of institutions and blockholders. This supports the active monitoring role of institutions/blockholders. Finally, we test the relationship between earnings informativeness for chaebol (Korean business group)-affiliated companies vs. that for nonchaebol-affiliated companies, and find no significant relationship between the owner–largest shareholders holdings and earnings informativeness. This provides evidence that for chaebol companies, the negative effect of management entrenchment/expropriation of minority shareholders offsets the positive effects. This phenomenon is stronger for chaebol-affiliated companies than for nonchaebol affiliates.

The Accuracy of Financial Analysts' Forecasts after Mergers:

This paper examines forecasts developed by financial analysts before and after mergers. The study finds that forecast accuracy decreases sharply after mergers. These accuracy reductions tend to be more pronounced when financial leverage changes, when the merger does not provide earnings or industry diversification, when the purchase method of accounting is used to record the transaction, when capital intensity changes, and when the size of the target corporation is large compared to the size of the acquiring corporation. The data also show that reductions in forecast accuracy after mergers tend to be temporary. Accuracy returns to approximately the premerger level within four years after the merger. The study also finds that overprediction bias increases sharply in the year immediately following the merger. This increase in over-prediction bias, however, is also temporary. Overprediction bias returns to approximately the premerger level within the four-year postmerger study period.

Human Resource Allocation in a CPA Firm: A Fuzzy Set Approach

The review of existing human resource allocation models for a CPA firm shows that there are major shortcomings in the previous mathematical models. First, linear programming models cannot handle multiple objective human resource allocation problems for a CPA firm. Second, goal programming or multiple objective linear programming (MOLP) cannot deal with the organizational differentiation problems. To reduce the complexity in computing the trade-offs among multiple objectives, this paper adopts a fuzzy set approach to solve human resource allocation problems. A solution procedure is proposed to systematically identify a satisfying selection of possible staffing solutions that can reach the best compromise value for the multiple objectives and multiple constraint levels. The fuzzy solution can help the CPA firm make a realistic decision regarding its human resource allocation problems as well as the firms overall strategic resource management when environmental factors are uncertain.

Stock repurchase in Korea: Market reactions and operating performance

This study examines the motive for stock repurchase. We examine four hypotheses — undervaluation, signaling, free cash flow, and optimal leverage hypotheses — using both short-run and long-run market reactions. We find that the undervaluation hypothesis is most consistent with both short-run and long-run tests. Improvement in operating performance following repurchase suggests the signaling hypothesis. However, the signaling hypothesis is supported only in the long-run test, not the short-run test, suggesting that market underreaction exists to the signaling initially. Of the control variables, the target purchase ratio and ownership by the largest shareholders are found significant, suggesting that the magnitude of repurchase and the ownership increase motive by the largest shareholders are also important factors that explain the repurchase.

The Influence of Tax Costs on Accounting Conservatism

This paper investigates whether the conservatism in financial reporting is driven by taxation. Although conservatism has been examined from the perspectives of contracting, shareholder litigation, and accounting regulation, few studies have examined the relation between taxation and accounting conservatism. Using unconditional conservatism measures, we find that the level of conservatism is positively related with a firms tax burden. However, the relation is not detected when a conditional conservatism measure is used, suggesting that use of an appropriate conservatism measure is important for testing tax motivated conservatism. Further study shows that the tax motivated conservatism is affected by the degree of book-tax conformity and the level of nontax costs. Firms with a closer link between book and taxable income are likely to have a stronger relation between tax costs and conservatism. Also we find that tax motivated conservatism is more prevalent for the firms with low nontax cost. Overall, this paper shows that taxation is a determinant of financial reporting conservatism in Korea.

THE ROLE OF ACCOUNTING INFORMATION IN STOCK MARKET LIBERALIZATION: EVIDENCE FROM KOREA

A stock market liberalization is a decision by a countrys government to allow foreigners to buy securities in that countrys capital market. This study examines how the liberalization of the Korean stock market affected stock price behavior and changed the role accounting information for investment decisions. The Korean stock market opened its door to foreign investment in 1991. Prior to this, market inefficiencies, such as the co-movement of stock prices with industry or market indices or investment based on rumor and speculation, were widespread. Since the opening of the stock market to foreigners, a more rational pricing behavior has emerged. This setting provides a unique opportunity to investigate how stock price behavior has changed with market liberalization and what was the role of accounting information in this process. Our results indicate that the co-movement behavior of stock prices by industry decreased and stock price differentiation based on individual firm characteristics increased after market liberalization. The results also show that the explanatory power of accounting numbers increased after market liberalization. Overall, the results imply that foreign investors contributed to the improvement of market efficiency with the opening up of capital markets in Korea. We believe that our results provide useful evidence to other capital markets that are in a similar situation.

Trading Behavior Prior to Public Release of Analyst Reports: Evidence from Korea†

This paper investigates information leakage from analyst reports prior to their public release. Previous studies document abnormal trading by institutions or short selling before announcement of recommendation changes. Such prerelease abnormal trading is interpreted as evidence of information leakage from analyst reports. However, if sophisticated investors obtain information similar to what analysts have from other sources, abnormal prerelease trading patterns would be observed even if there were no information leakage from analyst reports. This paper, using a unique data set from Korea, aims to determine whether a direct causal link between recommendation changes and prerelease trading exists, by comparing trading behavior of client investors with non-client investors. We find that abnormal prerelease trading by client investors, especially client institutions, is earlier in timing and greater in magnitude than that of other investor groups, supporting the information leakage hypothesis. We further find that net buying by client institutions and client large individuals is positively associated with firm, analyst, and earnings forecast change variables that influence formulation of recommendation changes and their impacts.

Firms’ Strategic Management Disclosure Policy Before Debt Offerings

This study examines firms’ strategic management disclosure policy before debt offerings. We extend prior studies by performing multiple regression analyses for both the level of and the change in management disclosure prior to debt offerings using a much more comprehensive set of sample firms. We find that debt issuing firms issue more management disclosures or increase them prior to debt offerings than do non-debt issuing firms, and that these management disclosures tend to be conservative rather than optimistic. We also provide some evidence that public debt issuing firms use more management disclosures than private debt issuers. Additional tests using alternative measures of management forecasts and methodologies similar to prior studies confirm our results. These results add convincing evidence to the literature in this area, where there is a lack of strong evidence.

Keiretsu Affiliation and Equity Values in Japan

This study examines the association between keiretsu affiliation and corporate equity value in Japan. We hypothesize that, ceteris paribus, keiretsu firm value, measured as Tobins Q, is higher than non-keiretsu firm value, reflecting the improved or active monitoring role of the keiretsu arrangement. The empirical tests are supportive after controlling for other financial and ownership variables. The results also show that keiretsu firm value is positively related to the strength of the keiretsu. This is additional evidence that the monitoring provided by the keiretsu relationship does indeed increase corporate equity value, and that the source of the increase in value is not merely a result of cross-shareholding, but inherent to the keiretsu arrangement. However, the effect of keiretsu membership and influence on market equity values has apparently diminished since 1990 (the post-market crash period in Japan).

The Difference Between Measuring Internal Funds Allocations in Groups and in Diversified Firms

Dependent variables used by Kim, Jung and Kim (2005) to assess the effect of the ownership structure of Korean chaebols on internal funds allocations are a priori misspecified in the context of their research, as they were designed to be applied when studying diversified firms and not groups consisting of legally independent entities. The conditions under which this misspecification has no effect on their conclusions are discussed. Re-analyzing their data with a more appropriate internal funds allocation variable leaves their conclusion on the presence of tunnelling effects intact, though it paints a partly different picture of internal allocations as such.