CEO Type and Earnings Management to Avoid Loss or Earnings Decreases: Evidence from South Korea

Kyunga Na; Yun-jeong  Lee; Hagyeong  Yu

Kyunga Na Chungbuk National University
Yun-jeong Lee Chungbuk National University
Hagyeong Yu Sungkyunkwan University

Keywords: CEO type, owner CEO, professional CEO, earnings management, discretionary accruals, real activity management

Abstract

This study examines the relations between the CEO type (owner CEO vs. professional CEO) and earnings management over 9,266 firm-years from 2011 to 2020 in Korea. Two earnings management measures, accrual management and real activity management (abnormal cash flow from operations, abnormal production cost, and abnormal discretionary expense), are considered as means to avoid reporting losses or earnings decreases. We partition the sample into two groups based on the type of CEO (owner CEO vs. professional CEO) and investigate whether earnings management is used for achieving earnings targets (small profit or small earnings increases) for each group. We find all earnings management measures are significant at the 5% level or better in the direction of aggressive earnings management in the owner CEO sample, while all but one measure (abnormal production cost) are insignificant in the professional CEO sample. Our findings suggest that an owner CEO is more likely to manage earnings to achieve small profit or small earnings increases compared to a professional CEO.

Author Biographies

Kyunga Na, Chungbuk National University

Na, Kyunga, is an associate professor in the International Business Department, School of Business, Chungbuk National University. She obtained her Ph. D from the University of Alberta, Edmonton, Canada. She also acquired her MBA from Cambridge University in the UK and MSc in Finance from Reading University in the UK. She is a charter holder (CFA) and has strong work experience in the financial industry (Banker Trust Company, Credit Agricole Indosuez, Schroders Korea Limited, and Woori CA Asset Management Company). Her research interests are accounting and international business. She has 30 articles published in Korean and International academic journals.

Author’s contact detail: International Business Department, N14 Building #513, Chungbuk National University, 1, Chungdae-ro, Seowon-gu, Cheongju-si, Chungcheongbuk-do, Repulic of Korea; phone number: +821033393463

Yun-jeong Lee, Chungbuk National University

Lee, Yunjeong, is currently a doctoral student at Chungbuk National University. She earned her undergraduate in business administration in 2018 and a Master of Business Administration degree in 2020 from Chungbuk National University. Her research interests lie in corporate governance, ESG, audit quality. She published 12 papers in Korean academic journals including the Korean Accounting Review.

Author’s contact detail: Business administration building N13, 1, Chungdae-ro, Seowon-gu, Cheongju-si, Chungcheongbuk-do, Republic of Korea; phone number: +8201049432690

Hagyeong Yu, Sungkyunkwan University

Yu, Hagyeong, is a researcher in the Business Research Center, Sungkyunkwan University. She earned her master’s degree in business administration at Sungkyunkwan University. And she is a doctoral student in the Department of Accounting, Sungkyunkwan University. Her research interest is Corporate Governance. She has an article in the Journal of Financial Regulation and Supervision.

Author’s contact detail: 25-1, Seonggyungwan-ro, Jongno-gu, Seoul, Republic of Korea; phone number: +821034349543

References

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