전기오류수정손익의 보고방식에 따른 정보효과 차이분석

This study investigates whether there are significant differences in stock market reactions to the prior period error corrections (hereafter ‘PPEC’) across accounting methods firms use. Prior to 1996 all PPEC were adjusted to retained earnings. As prior research shows that management frequently utilizes PPEC to manipulate earnings, the standard setter revised accounting standards for PPEC in the way that PPEC are reflected in the income statement for 1997-1998 fiscal year. However, the accounting standards for PPEC revised in 1999 required that PPEC be adjusted to retained earnings, except for income-tax-related error corrections that were recognized in the income statement. In 2001, the newly organized standard setter, the Korean Accounting Standard Board (KASB), issued the standards for accounting changes and error corrections (The KASB Statement No. 1) which requires a two-fold accounting treatment for PPEC. The Statement requires that PPEC be reported as income or loss from continuing operations in the income statement. However, if PPEC is material, it should be adjusted to retained earnings. In this case, if financial statements for prior periods are presented for the comparison purpose, the prior period financial statements should be restated. The issue of the accounting treatment for PPEC boils down to where PPEC should be reported. Thus, we examine whether investors evaluate information effects of PPEC differently depending upon where it is reported. The crux of the debates on accounting for PPEC over last 10 years is whether PPEC should be reported in the income statement or reported as an adjustment to retained earnings. The underlying premise is that investors’ evaluation of informativeness of PPEC differs depending upon where it is presented. If there is no difference in the market reactions to PPEC regardless of whether it adjusts retained earnings or net income, which method should be used may not be an important issue. On the other hand, if investors react differently even to the identical information depending upon the way it is presented in financial statements, the standard setter should consider this aspect in prescribing the accounting treatment. Nevertheless, the standard setter has not considered how investors actually evaluate the informativeness of PPEC. It is partly attributable to lack of empirical studies on this issue. Our study provides insights into this issue by finding the market’s differential reactions to PPEC across the reporting venues. Our sample consists of non-financial firms listed on the Korean Stock Exchange during 1991-2000. The regulatory environment and accounting practice for firms in financial industries are much more restrictive than those for firms in non-financial industries. Thus, we exclude financial institutions. Although the KASB Statement No. 1 was effective for fiscal years beginning after December 31, 2001, earlier adoption was encouraged. This suggests that the Statement could be applied even to 2001 financial statements for earlier adopters. Thus, we exclude 2001 and thereafter from the sample. Our final sample consists of 4,177 firm-years. To examine information effects of PPEC, we adopt an event-study methodology. We calculate abnormal returns using the market-model and market-adjusted metrics. The results are robust to the return metrics. We find that there are significantly negative market reactions to losses from PPEC, while there is no significant market reaction to gains from PPEC. In addition, the magnitude of the market reactions to losses from PPEC is bigger when the losses are reflected in the income statement than when they are reported as adjustments to retained earnings. We perform additional tests to investigate whether market reactions to PPEC differ between income tax-related PPEC and non-tax-related PPEC. The results reveal that tax-related PPEC losses reflected in the income statement are associated with significantly negative market reactions relative to other types of PPEC. The results suggest that investors perceive PPEC losses more informative when they are reported in the income statement than they are adjusted to retained earnings. Our results provide implications for the KASB Statement No. 1 which requires material PPEC to be reported as adjustments to retained earnings. Since investors perceive PPEC losses more informative when they adjust net income, reporting material PPEC gains and losses in the income statement rather than in the retained earnings statement can enhance their usefulness.