Does the Change in Accounting Standard Prompt Disposal of Financial Assets? Evidence from the Adoption of K-IFRS No. 1116

This paper examines whether the mandatory adoption of the International Financial Reporting Standards (K-IFRS) No. 1116 in South Korea affects managers’ incentives for income-increasing earnings management using financial asset sale transactions. Exploring data on publicly listed companies in South Korea for the period from 2016 to 2020, we find that firms with higher operating lease expenses are more likely to engage in income-increasing earnings management using financial asset sale transactions after the implementation of the new accounting standards on leases. This implies that the new accounting standard on leases has triggered earnings management by managers using financial asset sale transactions, consistent with our prediction. Furthermore, we find that this relationship is more pronounced with higher ERC difference. In cross-sectional tests, we also find that the moderating effect of ERC difference is more pronounced in high financial constraints. Moreover, we performed a series of robustness tests, additionally controlling for lagged variable and using alternative proxies for the independent variable, and we find that our main findings remain qualitatively unchanged. Collectively, our findings suggest that the accounting standard change has triggered earnings management.