The Effect of Name Changes on the Earnings Management in Korea

By Yoon, Soon Suk; Park, Min Kyong | Academy of Accounting and Financial Studies Journal, April 2015 | Go to article overview

The Effect of Name Changes on the Earnings Management in Korea


Yoon, Soon Suk, Park, Min Kyong, Academy of Accounting and Financial Studies Journal


INTRODUCTION

Recently, the financial press reports the trend that increasing number of firms change their names. Twenty four KOSDAQ firms have changed their names twice in a year and six firms have changed their names up to five times over the period of 2004 to 2011. Corporate name is supposed to serve as a signal to convey information about a firm's major business or product lines. Investors will be better served as long as corporate names can be associated with major businesses or product lines. A name change may well cause intangible assets such as trade mark or goodwill to disappear. Firms have accumulated some goodwill in the form of name recognition and company image. Also there are direct costs involved in changing names like legal fees and printings of new packaging and advertising outlays why do they change their names despite non-trivial cost associated with name changes? The value of a firm would be increased if corporate name change positively conveys the plan of real changes in the firm's business activities, restructuring or reorganization. Otherwise, investors would disorient by the new names.

Facing the rapid increase in corporate name changes, investors are advised to exercise caution when they make investment decisions in the firms which change their names, particularly when they purchase the securities of name change firms to disguise accumulated losses. According to our investigation, there is a big increase in corporate name changes by loss-reporting firms even though it is accompanied by non-trivial costs such as consulting fees and corporate identity costs. Some of firms changing their names are involved in litigations such as fraud or embezzlement. Some of them are administrative issues in the KOSDAQ market.

The KOSDAQ market has some features that can be distinguished from the KSE market. KOSDAQ firms are smaller and younger than KSE firms and the disclosure environment of the KOSDAQ market is inferior to the KSE. As a result, we believe the information asymmetry in the KOSDAQ would be worse than the KSE. Yoon (2005) finds that KOSDAQ firms tend to manage earnings more aggressively than KSE firms. So there is an increasing concern on the reliability and transparency of the financial statements of KOSDAQ firms.

We find that corporate name changes in the KOSDAQ market are more frequent than in the KSE market, particularly there is a big increase in KOSDAQ market. KOSDAQ firms are smaller and younger than KSE firms and they have lower intangible value associated with company names comparing to KSE firms so it would be easier to change their names.

And the announcements of corporate name changes in KOSDAQ have started since 2000 and they have announced reasons of changing definitely since 2007. The KOSDAQ market have enforced that firms changing name frequently should announce the details to prevent investors' confusion whether they had changed corporate name within 2 years since 2007 and it's one part of announcements management consolidation.

The prior literature of corporate name changes is almost about the relationship between corporate name change and stock price but they are scarce and the results in Korea are inconclusive. In this paper, we examine the purpose of the managements who change corporate name, different from the prior study.

This study was motivated by the suspicion that firms who change their names in KOSDAQ market would have intent to use name changing strategically for the change of corporate bad image. We suggest that corporate name change engage in earnings management to upward earnings around the time of their change.

We first examine empirically whether corporate name change firms are associated with discretionary accruals. We further divide the reasons of corporate name change into cosmetic change to hide negative earning, industry change or consolidation and change of the largest stockholders and examine whether there are differences among the corporate name change reasons. …

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