경영자의 과잉투자성향과 이익조정의 관련성 = Association between Managerial Overinvestment Propensity and Real and Accrual-Based Earnings Management

다국어 초록 (Multilingual Abstract)

It has long been recognized by many researchers that managers` decisions for resource allocation may be inefficient and can destroy investor value. Managers are inclined to make empire building decisions if not checked by some tight form of governance. Empire building decisions typically manifest themselves in the forms of excessive growth and excessive investment. It has been known that by increasing firm size, managers can pursue status, power, compensation, and prestige. This problem may exacerbate with the lack of information transparency. Previous research suggests that when managers are less accountable to the firm`s investors, they are more likely to make decisions for private gain, leading to poorer firm performance and ultimately loss of shareholder value. Financial disclosures are one important means of monitoring managers to make them more accountable. Investors seek high-quality disclosures that reduce information asymmetries between investors and managers. Financial accounting information is an important source of information used by shareholders and others to monitor managers. Increased transparency of accounting information causes managers to act more in the interests of shareholders, mitigating the problem of managerial overinvestment. This study was mainly motivated by the lack of empirical evidence on the relations between the accounting information quality and the degree of overinvestment propensity in the Korean context, and inconsistent explanations on such relations suggested by several previous researches. We examine the association between the accounting information opacity as proxied by earnings management and the managerial propensity for overinvestment. It is hypothesized that earnings management magnifies the information asymmetry between the firm and outside investors and between the management and stockholders, thereby hindering monitoring and checking on inefficient managerial decisions, which will lead to increased propensity to overinvest. This study also intends to show that the earnings management motivates the overinvestment and not vice versa. A related research objective is to examine whether the overinvestment propensity is exacerbated by external financing. These research objectives aim at shedding light on one negative side-effect of earnings management by demonstrating the associations between earnings management and inefficient investment decisions, in contrast to many previous researches, which mainly focused on associations between specific motives and the evidence of earnings management under various contexts. We analyze the relation between the earnings management and overinvestment on a sample of 49 firms targeted by the Financial Supervisory Service for allegedly overstating annual earnings, and on a separate sample of 6,328 firm-years consisting of firms listed in KRX over the period of 1995 to 2008. The proxies for earnings management of normal firms are measured by the discretionary current accruals and abnormal inventory changes using the forecasting models proposed by Kothari et al. (2005) and Roychowdhury (2006) respectively. The propensity to overinvest is measured by estimating the traditional Tobin`s Q model and its modified version proposed by McNichols and Stubben (2008). The analysis yields following key findings. First, the window dressing settlement firms targeted by FSS undertake overinvestment in the same period as they are subject to the FSS enforcement action. The proxies of earnings management of separate sample consisting of normal firms, measured by both discretionary current accruals and abnormal inventory adjustments, are positively associated with the measure of overinvestment on a contemporaneous basis. Second, the overinvestment phenomena during the earnings management periods are significantly more evident for firms with greater external financing, which corroborates borrowing firms to manage earnings to facilitate external financing, which is directed into overinvestment activities. This result implies that earnings management is likely to inhibit monitoring and checking on managers by external capital providers rather than internal monitoring systems such as boards, which tends to allow inefficient managerial overinvestment decisions. Thirdly, the timeseries as well as cross-sectional causality tests indicate that earnings management causes overinvestment, whereas overinvestment does not cause earnings management. Finally, the managerial overinvestment propensity tends to be alleviated by sound governance mechanism but intensified by higher agency costs. In sum, the above results show that managerial earnings management motivated by various reasons may lead to inefficient corporate investment decisions. This suggests that discretionary earnings management by managers may aggravate the information asymmetry between management and various stakeholder groups to mislead the expectations on the future growth prospect, resulting in the distortion of resource allocations. This result provides an important implication for diverse interest groups participating in the corporate investment decisions and a logical underpinning on the relationship between the quality of accounting information and the cost of capital. External capital providers are expected to demand extra risk premium from borrowing firms characterized by less transparent information as an insurance against future expected loss likely to be caused by inefficient managerial decisions, which establishes a negative link between the information quality and the cost of capital.