1. “Principles-Based Accounting Standards and Regulatory Enforcement."
AAA Outstanding International Accounting Dissertation Award Recipient of 2020 Annual Meeting (IAS Section)
Based on my PhD thesis at Florida State University
ABSTRACT: Practitioners argue that rules-based enforcement regimes create a safe harbor protection against regulatory compliance risk, while standard setters maintain that principles-based securities regulation removes undue enforcement risk by emphasizing substance over form. I extend this discussion by studying the changes in enforcement and reputational costs prompted by a shift from a rules-based to a principles-based GAAP regime. A temporal analysis of a proprietary dataset on national accounting inspections from South Korea, in conjunction with their mandated adoption of IFRS in 2011, suggests that a shift toward a principles-based enforcement regime is followed by lower inspection rates and higher detection likelihoods. For publicized inspection reports, market reaction tests indicate that GAAP violations detected under more principles-based enforcement systems trigger larger share price discounts and greater declines in the perceived earnings quality of misreporting firms, which imply larger reputational costs. These results are policy relevant in light of the FASB's and IASB's joint proposal advocating a more principles-based approach to securities regulation.
2. "Why Firms Announce Good News Late: Earnings Management and Financial Reporting Timeliness."
Co-authors: Spencer Pierce (Florida State University) and Ira Yeung (University of British Columbia)
Accepted at Contemporary Accounting Research (forthcoming)
ABSTRACT: Prior studies find that delayed earnings announcements tend to communicate unfavorable news, and investors consequently react negatively when firms delay earnings announcements. However, these findings do not explain why investors discount delayed earnings, even after controlling for the earnings news, and why firms sometimes announce good news late. Motivated by theory from Trueman (1990) that attempts to explain these phenomena, we examine whether announcement delays indicate earnings management. We find that good news firms with higher discretionary accruals are more likely to announce earnings late. Consistent with post fiscal year-end activities driving announcement delays, we fail to find a relation between measures of real earnings management and late announcements. Using a last-chance earnings management measure based on tax expense manipulation, we find strong evidence that good news firms engaging in last-chance earnings management are more likely to delay earnings announcements. Consistent with Trueman’s (1990) theory that earnings management explains why investors discount delayed earnings announcements, we find that the negative relation between earnings announcement returns and announcement delays is partially driven by late announcers relying on last-chance earnings management to beat analysts’ expectations.
3. “Post-Litigation Reporting Conservatism."
Co-authors: Frank Heflin (University of Georgia), Robbie Moon (Georgia Institute of Technology), and Spencer Pierce (Florida State University)
ABSTRACT: We investigate changes in financial reporting conservatism arising from disclosure-related shareholder lawsuits filed between 1996 and 2016. We find that sued firms respond to 10b-5 litigation with increased accounting conservatism. Consistent with a spillover effect, we also find that non-sued peer firms increase accounting conservatism following litigation. Despite the FASB having eliminated conservatism as an essential qualitative characteristic from the conceptual framework in 2010, we find the post-suit spike in conservatism persists after 2010, suggesting a capital market demand for conservatism even without regulator intervention. Our results extend prior studies examining the disclosure effects of litigation by providing evidence that litigation triggers a subsequent increase in conservative accounting choices and support the widespread but untested belief that litigation induces accounting conservatism.
4. "Mandatory Disclosure and Knightian Uncertainty."
Co-authors: Taejin Kim (Korea University) and Kyungha Kari Lee (Rutgers Business School)
ABSTRACT: We build a two-dimensional model characterizing firms' disclosure decisions in the mean-variance (μ,σ) space where risk information matters due to uncertainty aversion in financial markets. In equilibrium, joint disclosure thresholds are characterized by cutoff regions depicting more favorable news: higher means and lower variances. Applying this framework, our model predicts that mandatory disclosure of risk and voluntary disclosure of returns on investments are complimentary in the presence of proprietary cost incurred from jointly disclosing the first and second moments as a pair; however, such consequences arising from mandatory risk reporting reverse as substitutory, in lowering voluntary disclosures regarding first moments when we further allow for Knightian uncertainty in the two model parameters. Our analysis suggests that stringent regulation on firm-specific risk disclosure may improve disclosure of second moments only at the cost of reduced first moment disclosure quality when capital markets are ambiguity averse.
Mark Paul Kim
Anderson School of Management
110 Westwood Plaza D-415
Los Angeles, CA 90095-1481
Phone: +1 (310) 206 9939