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Urban versus rural firms and opportunistic earnings management: Korean evidence
Jong - Hag Choi,
Seoul National University
Joseph Comprix, Arizona State University
Helen Hyejin Kwon, Sogang University
Hye - Jeong Nam, Seoul National University
ABSTRACT. Using 7,169 firm-year observations from Korean listed companies over 2000-2004, we find that firms located in Seoul or its surrounding metropolitan area (i.e., urban areas) are more likely to manage earnings than firms located in other areas (i.e., rural areas). Both income-increasing and income-decreasing discretionary accruals increase for urban firms when compared with rural firms. Our findings suggest that due to greater attention from large numbers of urban investors, analysts, and other market participants, urban firms face greater pressure to manipulate earnings to satisfy the market. However, we fail to find evidence of an association between firm location and increased earnings management for sub-samples of larger firms and firms audited by Big 5 auditors, which are likely to be more closely monitored by investors and other market participants. These findings are robust when we control for the endogenous firm location choice.
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