A Study on the Relationship between Optional Management Performance Requirements and Earning Management for KOSDAQ IPO Firms

[Purpose] This study analyses whether the behavior of earnings management according to satisfied number of performance requirement when initial public offering for listed companies registered in the KOSDAQ market. [Methodology] The sample of this study is 314 firm－year registered in the KOSDAQ market and period was set from 2013 to 2022 because the same requirement can be applied in IPO. The proxy for earnings management is discretionary accruals estimated by the Kothari et al.(2005) model and it was analyzed whether there is a significant relationship with satisfied number of performance requirement by taking dummy variables, such as ① ROE 10% or more, ② Net income of 2 billion(KRW) or more, ③ Sales of 10 billion(KRW) or more, and ④ sales growth 20% or more. [Findings] As a result of regression analysis, the level of discretionary accruals was different by satisfied number of performance requirement. Specifically, in case only one or two are met the condition to performance requirements dummy variable has a positive coefficient and is significant at the 1% level. On the other hand, when the number of performance requirements is relatively large (three or four are met) showed that the dummy variable has a significant negative coefficient at the 5% level. These results suggest that earnings management was more aggressive when performance in the business year immediately before IPO disclosure was low, but if performance requirements was sufficiently met, a strategy was implemented to prevent excessive earnings－inflating adjustments or reduce earnings. [Implications] This study is different in presenting empirical results that the intention to earnings management may vary depending on the degree that meets the performance requirements. This study suggests the possibility that ‘at least one satisfaction’ in performance requirements can be make bad use by top management as opportunistic intentions. Therefore, this study contribute to suggesting that a minimum regulatory mechanism related to performance requirements is needed in order to stabilize the market and protect investors.