지배주주지분변화 전 이익조정과 주주간 이해상충 = Earnings Management before a Change of Controlling Shareholder`s Equity Holdings and Conflicts between Shareholder`s Interests

다국어 초록 (Multilingual Abstract)

The purpose of this paper is to examine the mechanism through which controlling owners expropriate minority shareholders. Specifically, This paper provides direct evidence that controlling owners expropriate minority shareholders through earnings management before they trade in their own firms` stock. Controlling shareholders have strong incentives to expropriate wealth from minority shareholders to promote their own economic benefits through various self-dealing transactions(Shleifer and Vishny 1997, Johnson et al. 2000). Despite this claim, only limited systematic evidence is available concerning the specific mechanism used by controlling owners. How is expropriation actually achieved? This paper allows us to describe one such mechanism. Earnings management associated with controlling owner trading in Korea is particularly adequate to investigate the means of expropriation for several reasons. First, in an environment where most firms belong to business groups controlled by a single ultimate owner (i.e., controlling owner), controlling owners hold significant percentage of outstanding shares in their firms. They assume a significant role in managing their companies, usually holding the chief executive or chairmanship in their companies. This allows controlling owners to engage in earnings management to their benefit. When controlling owners trade in their own firms`stock, they will have strong incentives to sell high and buy low. Earnings management helps controlling owners achieve this. Second, earnings management through accounting accruals is an attractive means to set the stock price artificially high or low in the present context because it is hard to find earnings management to outsiders. This study finds strong evidence that controlling owners deflate (inflate) earnings before they buy (sell) their own firms` stock. Since minority shareholders who transact with the controlling owner under this condition suffer from unfair prices attributable to earning management, this amounts to expropriation of minority shareholders by the controlling owner. This study`s finding is unique on the symmetry between the gains of the controlling owner and the losses of minority shareholders. Because of such a symmetry, this study`s results unambiguously show how controlling owners use earnings management to expropriate minority shareholders. This finding is also supportive of the observation by Shleifer and Vishney(1997) that the conflicts between the controlling shareholder and minority shareholders are important in firms with concentrated ownership, especially where ownership is not separated from management. This study adds further insights into both the insider trading and earnings management literatures. Since the possibility of active earnings management before controlling owners` trading has largely been ignored in the literature, investigating earnings management associated with controlling owners` transactions enhances our understanding of the insiders` opportunistic behavior. Second, unlike most earnings management studies, the current context enables us to interpret earnings management in the light of the conflicts between the controlling owner and minority shareholders. Since the controlling owner sells after overstating earnings and buys after understating earnings, minority shareholders lose by precisely the same amount as the controlling owner gains. From this perspective, this study poses earnings management as a strong and direct indicator of the means through which controlling owners expropriate minority shareholders. Given that evidence concerning how expropriation is actually achieved is scarce, this paper provides additional insights into the mechanism used by the controlling owner to expropriate minority shareholders.

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