기업지배구조와 이익유연화에 관한 연구

This study examines the effect of corporate governance on income smoothing. Prior literature classifies between accrual-based earnings management and real earnings management and generally argues that income smoothing is negatively associated with corporate governance quality. The reason is that earnings management increases investor uncertainty of reported earnings and information risk (Choi 2007, Kim et al. 2011). However, more recent studies show that managers can convey private information by reducing earnings volatility so that firms associated with more income smoothing tend to experience higher stock returns and improvements in debt ratings. Moreover, income smoothing has been shown to increase analysts’ earnings forecast accuracy and decrease firms’ cost of capital (Tucker and Zarowin 2006, Gu an Zhao 2006, Li and Richie 2009, Amiram and Owens 2011). As a result, prior literature shows that accrual-based earnings management and real earnings management are not only associated with negative consequences such as aggravating firms’ profitability but can also have positive effects by improving earnings informativeness. These findings suggest that earnings reporting choices inducing positive effects in the capital market should be encouraged in firms with stronger corporate governance and that firms will be incentivized to choose earnings reporting strategies that elicit such favorable responses. To test the association between corporate governance and income smoothing, our study employs a corporate governance quality index issued by the KCGS including their subscores on five different corporate governance characteristics. We adopt two different income smoothing measures following Leuz et al.(2003) and Tucker and Zarowin (2006) to facilitate comparability. Our sample consists of listed companies from 2004 to 2009 with a total of 2,726 firm-year observations. The results of our analyses are as follows. First, we find that higher corporate governance quality scores are associated with more income smoothing regardless of the choice of different income smoothing measures and even after controlling for other factors that could affect the level of income smoothing. This finding is in line with the prediction that firms with stronger corporate governance tend to favor income smoothing since the management in such firms is likely to utilize income smoothing as a means to communicate or signal private information to the market thereby decreasing time-series-related earnings volatility. Second, from the analyses using the subcategorical corporate governance quality scores based on the five different corporate governance characteristics, we also show that high ratings on the category “distribution of earnings” exerts the greatest impact on the degree of income smoothing. In addition, our results reveal that firms which scored high on the category “protection of shareholder rights” (even though only marginally significant) are positively associated with the level of income smoothing. Our result suggests that board of director- and auditor-related attributes could affect the quality of reported earnings but that in the case of income smoothing the market-related external factors of corporate governance have a significant impact on firms’ propensity to smooth earnings. We contribute to the existing literature on corporate governance and income smoothing in several ways. First, despite survey results that illustrate managers’ preference for income smoothing (Graham et al. 2005) and a number of research portraying managers’ ability to efficiently communicate private signals through income smoothing, we are the first to directly investigate the relation between income smoothing and corporate governance. Therefore, our study extends the prior literature not only related to corporate governance but also related to income smoothing. Second, prior literature has mostly shown that firms with strong corporate governance tend to refrain from adopting aggressive accounting practices such as accrual-based or real earnings management that may involve opportunistic intentions of managers. Contrary to these findings, however, we are able to provide empirical evidence that firms with stronger corporate governance are more likely to smooth their earnings and, thus, propose that income smoothing in firms with strong corporate governance can act as a means to communicate private signals to the market by decreasing time-series-related earnings volatility. Lastly, our study highlights the potential positive effects related to income smoothing whereas in prior literature income smoothing is largely associated with negative evaluations. In particular, prior works investigating how income smoothing is evaluated in the market have mostly pointed out some positive effects only related to external mechanisms. However, our study is the first to shed light on related internal mechanisms by directly investigating the association between income smoothing and corporate governance. Specifically we show how better corporate governance based on strong internal mechanisms affect managers’ earnings reporting strategies and provide insights into what earnings reporting strategies are favored in firms with strong corporate governance. By examining managers’ earnings reporting strategies emphasizing the role of corporate governance, our study should be of interest to academicians, practitioners and regulation setters.