The Effects of Operating Loss on Earnings Management through Discretionary Accruals between KOSPI and KOSDAQ

[Purpose]There are differences in the delisting regulation related to persistent operating losses in KOSDAQ and KOSPI. Considering this, this research examines the effects of market regulations on earnings management, focusing on operating losses. This paper investigated the effects of operating loss and operating loss duration on the earnings management through discretionary accruals, and compared the effects between the KOSPI and KOSDAQ. [Methodology]Because reported (ex－post) operating income is already adjusted with earnings management, both the ex－post and ex－ant operating loss were investigated. 17,291 non－financial companies sampled out from the KOSPI and the KOSDAQ between 2011 and 2021. [Findings]First, many companies changed reported operating income from the ex－ant operating loss to the ex－post operating profit by earnings management. Second, the companies with ex－ant operating loss increased earnings through discretionary accruals. Third, the earnings management increased according to the duration of operating losses. Fourth, the KOSDAQ companies showed greater earnings management than the KOSPI companies. [Implications]Companies have a tendency of earnings management through discretionary accruals when operating loss was expected. And KOSDAQ companies, which face more risk under market regulations based on the operating losses, tend to more earnings management when operating loss was expected. These results can be used to establish market regulations by regulatory agencies and to make decisions by accounting information user.