건설업과 타 산업간 이익품질의 비교

This study examines whether earnings quality is different between the construction industry and other industries. The construction industry has relatively long construction period and operating cycle compared with other industries. Contract amount per project is considerably large and periodic performance depends severely on cyclical business fluctuation in the construction industry. Thus, cash flow is more volatile for the construction industry than for other industries. Prior research reports that earnings quality is lower for longer operating cycle than for shorter operating cycle and that it is lower for more volatile cash flows than for less volatile cash flows. If construction companies are required to use completed contract method in recognizing revenue despite such industry characteristics, earnings quality of the construction industry might fall behind other industries. Accordingly, managers of the construction companies would prefer accounting alternatives which can complement disadvantages incurred from low earnings quality. As revenue recognition principle, percentage-of-completed method has been used widely in this perspective. This study compares earnings persistence of construction industry with that of other industries. Earnings persistence is one of the most popular accounting-based earnings quality measures. We decompose earnings persistence into persistence attributable to cash flows and accruals to manifest essential characteristics of earnings quality in the construction industry. It is hypothesized that earnings persistence attributable to cash flows of the construction industry is lower than that of other industries while earnings persistence attributable to accruals of the construction industry is higher than that of other industries. Empirical analysis is performed for the sample consisting of 11,465 non-financial firm-years with December fiscal year that are traded over Korea Exchange for 1985- 2008. Empirical results support our expectation. Cash flow persistence is significantly lower for the construction industry than for other industries. On the other hand, the construction industry shows significantly higher accruals persistence than other industries. This indicates that the percentage-of-completed method, widely used as revenue recognition principle in the construction industry, enhance earnings quality through mitigating volatile cash flow by accruals. Additional analysis shows that earnings quality of the construction industry measured by earnings predictability, accrual quality, and income smoothness is not low compared with other industries. The mandatory adoption of K-IFRS in 2011 by all public companies in Korea triggers controversial debates over revenue recognition principle in the construction industry. The main issue is whether construction companies can apply percentage-of- completed method for the contracts of pre-sale construction under K-IFRS. The result in this study provides evidence that earnings quality of the construction industry characterized by the percentage-of-completed method is sufficiently competitive compared with other industries and that the percentage-of-completed method could be a natural consequence of seeking out alternative accounting methods to show less volatile earnings in the construction industry. From the standpoint of accounting policy, empirical evidence of accounting information quality as well as logical interpretation of accounting theory or standards is indispensable to minimize the possible errors in arriving at final conclusion. This study suggests policy implications for industry-specific accounting standards, especially in the construction industry.