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This study examines the consequences of International Financial Reporting Standards (IFRS) adoption in terms of the investor perception of earnings quality in the Korean stock market. Building on evidence from Ecker et al. (2006) suggesting that return-based earnings quality (E-loading), as captured by the sensitivity of stock returns to accounting information risk, accurately represents investor perceptions of earnings information risk, the authors examine whether E-loading is different between the pre- and post-IFRS adoption periods. Using KSE-listed firms from 2006 to 2014, the authors find the evidence that the extent of stock return sensitivity to information risk embedded in financial statements is greater in the period of post-IFRS adoption than in the period of pre-IFRS adoption. This finding indicates that even though accounting-based earnings quality improves after the adoption of IFRS, investors perceive earnings information after the adoption of IFRS as riskier than before. In addition, the difference in investor perception is more pronounced for firms with low accruals quality as captured by discretionary accruals, indicating that the effect of IFRS adoption on return-based earnings quality is distinctive from that on accounting-based earnings quality. The paper contributes to the literature on IFRS by exploring the effect of IFRS adoption through a new perspective on earnings quality in capital market.

This paper investigates whether labor union strikes have an effect on earnings management. Most prior studies have concluded that companies with labor unions are less engaged in earnings management than companies without labor unions. For the agency cost perspective, Jensen and Meckling (1976) insist that labor unions monitor management. Because union members have considerable information about companies, labor unions play a governance role to diminish management behavior pursuing private wealth. On the different view, labor unions intend to raise wages in negotiation if the company reports higher earnings. Therefore, management is motivated to reduce earnings to minimize wage increases when they negotiate with labor unions (Liberty and Zimmerman, 1986; Mora and Sabater, 2008). Chen et al. (2012) show that companies in the industry with higher labor force unionized rate have more positive response in the bond market. They posit that unionized workers have strong incentive to monitor management’s actions to ensure the firm’s health and that the market reacts positively. Lee et al. (2013) show that management engages in more conservative accounting when labor unions join stronger federations of unions. Kim et al. (2016), however, suggest that management is incentivized to increase earnings in firms with union strikes. They conclude that firms that experience labor strikes are engaged in upward earnings management because management tries to recover poor financial performance and bad reputation in the market due to strike. As for labor union strength and earnings management, different perspectives of management incentive to manage earnings stand opposed to each other, and the empirical results are not consistent. It is therefore important to investigate empirically whether earnings management varies according to labor union strength and whether the effect of labor union strength on earnings management is different from the effect of labor union presence on earnings management. Unlike the prior research, we use union strike as a proxy of union strength to investigate the effect of labor union strength on earnings management. Union activity such as strike is a better proxy because strike is occurred by the union when the union has strong bargaining power (Myers and Saretto, 2010). We conjecture that managements have complicated motivations to manage reported earnings according to union strikes. On the one hand, they have incentive to manage earnings downward for negotiations with labor unions. Managements lower the upper limit of future wage increase by reducing reported earnings. On the other hand, managements would manage earnings upward to recover from bad financial performance and declining stock prices caused by union strikes because shareholders regard strikes costly events. To examine our research question, we use union strikes as a proxy for unions, while prior research used unionized rate or federation of unions to capture union strength. Using Korean listed firms from survey data from 2005 to 2013, we find that union strikes relate to increased earnings management. We observe earnings management increase in strike years compared to the prior year. This result is robust after controlling for the presence of union, which has a negative coefficient. This suggests that management has complicated incentives regarding union and union strike, while prior research insists that management reduces earnings management by union monitoring. Management intends to increase reported earnings since strikes negatively affect firm financial performance and market reaction, while they intend to reduce earnings due to union monitoring.

We examine the relationship between the abnormal investment of firms and post-earnings announcement drift(hereafter, PEAD). Considering that firms’ abnormal investment activity would reflect manager’s inefficient decision making, we suggest that it relates to information uncertainty for firm valuation. Thus, we investigate whether PEAD phenomenon, which is explained by investor’s under-reaction to accounting earnings information, is systematically related to the abnormal investment of firms. Further, given by previous studies that market’s reaction to over-investment and under-investment differs each other, we test the difference in effects of over-investment and under-investment on the magnitude of PEAD. Using KSE-listed firms from 2003 to 2015, we find that the proxy for abnormal investment, measured by using McNichols and Stubben(2008) model is positively related to the magnitude of PEAD on unexpected earnings. Notably, the PEAD occurs only when managers engage abnormal investment activity and also this result is statistically significant for firms with under-investment, not for firms with over-investment. This means that stock prices response is more inefficient for earnings information of firms with under-investment than over-investment, implying that investors do not cope efficiently with information uncertainty due to manager’s under-investment activity. Additionally, provided by previous studies that managers’ abnormal investment activity and earnings management is mostly simultaneous, we test our hypothesis using sub-samples splited into upward- and downward earnings management. The results show that the positive relation between under-investment and PEAD exists for firms with upward earnings management. Our study discriminates from previous literature on PEAD in that we present the empirical evidence on the firms’ internal factor such as manager’s inefficient investment decision making brings about information uncertainty and consequently has a influence on PEAD. Moreover, this study contributes to the literature on the consequences of firms’ abnormal investment, showing that managers’ under-investment is likely to cause the information uncertainty and lead investors to mispricing.