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논문 기본 정보

자료유형
학술저널
저자정보
박종일 (충북대학교) 최관 (성균관대학교) 조은혜 (성균관대학교 경영대학 박사과정)
저널정보
한국세무학회 세무와회계저널 세무와회계저널 제19권 제2호
발행연도
2018.1
수록면
165 - 208 (44page)

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This study examines the effect of financial reporting uncertainty that is proxied by accruals quality on a firm’s actual litigation risk. Previous studies define accruals quality as the extent to which accruals map into last-period, current-period, and next-period operating cash flow realizations (Dechow and Dichev, 2002;Francis et al., 2005). The more accruals are to be converted into operating cash flows, the easier to forecast firm’s future cash flows, therefore, decrease information uncertainty. On the contrary, the lower the accrual quality, the higher the uncertainty about company’s prospects. Managers are likely to disclose accounting information including financial errors or distortions of future cash flows for firms in high information uncertainty. Previous studies have considered accruals quality as a proxy variable for information asymmetry or information risk (Dechow and Dichev, 2002;Francis et al., 2005;Balakrishnan et al., 2012). As such, if investors make an investment in companies with low accrual quality, they are likely to confront financial uncertainty. They may face increasing possibility to file a lawsuit against the companies. Therefore, we expect that the occurrence of corporate lawsuits (Hypothesis 1) and amounts of litigation (Hypothesis 2) are higher for the firms with low accrual quality. We manually collect data about the existence of lawsuits and the amount of litigation from the footnotes of audit reports. We measure accruals quality (Total AQ) as the standard deviation of residuals from the regressions relating current accruals to cash flows (Francis et al. 2005). We also divide the Total AQ into two parts. One is the accruals quality driven by economic fundamentals (Innate AQ) and the other one driven by management discretion (Discretionary AQ). The sample of this paper consists of companies listed in the Korea Stock Exchange from 2001 to 2013. We restrict the sample firms for non-financial firms whose fiscal year ends in December. Final number of sample is 4,901 firm-year observations, of which 1,801 firm-year observations * Professor, School of Business, Chungbuk National University, parkjil@chungbuk.ac.kr, First Author ** Professor, School of Business, Sungkyunkwan University, kwanchoi@skku.edu, Co-author *** Ph. D., School of Business, Sungkyunkwan University, gracejo@skku.edu, Corresponding Author 208 세무와회계저널 / 제19권 제2호(2018. 4.) (36.7 percent of firms) are under litigation. The results of empirical analysis are summarized as follows. First, firms with lower accrual quality have higher possibility of facing lawsuits even after controlling other factors which could affect the occurrence of corporate lawsuits. Both innate accruals and discretionary accruals affect the increasing occurrence of corporate lawsuits. Second, firms with lower total accrual quality or discretionary accrual quality have a significantly higher amount of litigation. However, innate accrual quality is not significantly related to the amount of litigation. It implies that investors are not indifferent in making decisions depending on the source of accruals quality. They give greater weight to the accruals that reflect manager’s opportunistic behavior and information uncertainty but do not give serious consideration to the accruals of innate fundamentals. This means that discretionary accrual quality has more important effect on the amount of litigation than innate accrual quality. Third, when we divide full sample firms into sub-samples based on the type of Big 4/non-Big 4 auditors, the firms audited by Big 4 auditors face higher occurrence of litigation and amount of litigation. Fourth, the firms with speculative grade of credit ratings have stronger relations between accrual quality and litigation than the firms with investment grade. Fifth, firms observations in pre-IFRS period have more significant relations between accrual quality and litigation than those in post-IFRS period. This study has several contributions. It shows there is a systematic relation between the financial reporting quality proxied by accruals quality and the actual occurrence of litigation. The firms with low accruals quality face higher incidence of corporate litigation because these firms have higher information asymmetry and information uncertainty. It suggests that reporting quality as captured by accruals quality is valuable information for investors. We believe that this study provide important implications for understanding the characteristics of firms with litigation in terms of financial reporting quality. As there is growing number of firms with lawsuits in Korea, findings of this paper will be of interest to practitioners, regulators as well as academicians.

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