판매보증비를 이용한 손실회피

Our research is to examine whether warranty expenses related sales are used to avoid losses. We also analyze how investors understand the warranty reserves of the suspect firms that engaged in earnings management if the firms have incentives to manage earnings to meet financial reporting targets and the target is to avoid losses. We begin with all firm－year observations in Korea Stock Exchange (KRX) listed firms for the years 2006－2010 and delete the firms in the financial industries. We retain in our sample those firms that report warranty expenses three or more times and the final sample consists of 766 firm－year observations representing firms. Firms which provide product warranties are required to accrue warranty expenses at the time of sales. Like other accruals, warranty expenses are estimated based on firm’s predictions of future claims. Warranty expenses are an important selling expenses and can be substantial depending on the industries. In our sample, the average warranty expenses range 0.68% of sales and 11% of operating income. Every industry has the different rate in various measures of earnings under a different warranty policy. We assume that earnings management contributes to the discontinuity in frequency of firm－year around zero, with a disproportionately low frequency in the immediate left parts of zero and high frequency in the immediate right parts of zero. If a firm’s financial reporting number falls short of the earnings target, the firm is likely to manage earnings to meet or beat the target. We define suspect firms as those firms that report small annual profits after post－management. Our first hypothesis concerns that we expect an association between abnormal warranty expenses and the earnings benchmark if companies use warranty expenses to avoid reporting a loss. Our results demonstrate that the suspect firm－year reports significantly lower abnormal warranty expenses compared to the rest of samples. This evidence means that the firms manage discretionary warranty expenses to avoid losses. Our second hypothesis concerns the valuation and earnings management views. We investigate how the market responds to warranty reserves accrued with warranty expenses. Our empirical research shows that firms which use warranty accruals to avoid losses have a negative coefficient on the interaction of suspect firms and warranty liabilities but they are not significant. This suggests that investors value warranty reserves differently from other liabilities, but markets do not recognize the warranty liabilities of the firms that are suspected to manage warranty expenses to avoid losses. Warranties play an important role in providing product assurance to customers and a firm provides the warranty as an aggressive marketing strategy recently. Our evidence indicates that warranty expenses provide the chance to exercise firms’ discretions to achieve financial reporting objectives. Our findings also provide the basics how to control the warranty expenses that are likely to engage in earnings management.