Book-tax income differences frequently serve as a key proxy in studies investigating earnings management and tax sheltering activities. This is reasonable because managers can manage either book income or tax income to accomplish their personal agendas. However, because a substantial portion of the book-tax differences are affected by unidentified factors, researchers should use them with caution and include additional relevant variables that could augment their findings. JEL classification: M4, K34, L25
Purpose Charting the earnings numbers reported by Korean firms produces a bell curve, but for a sharp discontinuity in the area surrounding zero. The purpose of this paper is to investigate if and how a large segment of Korean managers might manage accounting numbers to produce the observed result. Design/methodology/approach This study adopts an empirical research method using Korean listed firms as a sample. The primary focus of investigation is on major income statement variables that might produce the observed results in earnings from operations and net income. Findings Managers of Korean firms opportunistically use almost all income statement variables to influence earnings numbers. They manage revenues and selling, general & administrative expenses to report small positive earnings from operations, but manage non-operating gains (losses) to report small positive net income. Research limitations/implications This paper does not answer several questions related to loss avoidance. First, the paper did not examine which actions, such as discretionary accruals, opportunistic business decisions, or bogus transactions, were employed to affect line items on the income statement. Second, the paper did not investigate what specific incentives trigger Korean managers to report small positive earnings. Korean firms have traditionally raised capital by borrowing funds from creditors and governmental agencies. Thus, they may be concerned that reporting losses would reduce their borrowing capacity. Finally, corporate governance, such as CEO tenure and option grants may influence the extent of earnings management to avoid losses, but most corporate governance data for Korean companies must be manually collected. Accordingly, these subjects are left for future studies as well. Originality/value This study contributes to accounting literature by reporting how managers of Korean firms artificially coordinate major income statement variables and report small positive earnings figures, noting the differences between earnings management investigating methodology and ones used in previous studies.
The author acknowledges the valuable contribution of Nancy Farhat, without whose enthusiasm and assistance this article would have been neither started nor completed. 1. Title 18 U.S.C. § 1151 (1988) defines "Indian country" as: (a) all land within the limits of any Indian reservation under the jurisdiction of the United States Government, notwithstanding the issuance of any patent, and, including rights-of-way running through the reservation, (b) all dependent Indian communities within the borders of the United States whether within the original or subsequently acquired territory thereof, and whether within or without the limits of a state, and (c) all Indian allotments, the Indian titles to which have not been extinguished, including rights-of-way running through the same. 2. The Major Crimes Act provides: Offenses committed within Indian country (a) Any Indian who commits against the person or property of another Indian or other person any of the following offenses, namely, murder, manslaughter, kidnapping, maiming, a felony under chapter 109A [18 U.S.C. § § 2241-2245 (1988)], incest, assault with intent to commit murder, assault with a dangerous weapon, assault resulting in serious bodily injury, arson, burglary, robbery, and a felony under section 661 of this title within the Indian country, shall be subject to the same law and penalties as all other persons committing any of the above offenses, within the exclusive jurisdiction of the United States. (b) Any offense referred to in subsection (a) of this section that is not defined and punished by Federal law in force within the exclusive jurisdiction of the United States shall be defined and punished in accordance with the laws of the State in which such offense was committed as are in force at the time of such offense. Major Crimes Act, 18 U.S.C. § 1153 (1988). 3. The Indian Country Crimes Act provides: Except as otherwise expressly provided by law, the general laws of the United States as to the punishment of offenses committed in any place
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