Using a unique setting in which mandatory audit firm rotation was required from 2006–2010, and in which both audit fees and audit hours were disclosed (South Korea), this study provides empirical ...evidence of the economic impact of this policy initiative on audit quality, and the associated implications for audit fees. This study compares both pre- and post-policy implementation and, after the implementation of the policy, mandatory long-tenure versus voluntary short-tenure rotation situations. Where audit firms were mandatorily rotated post-policy, we observe that audit quality (measured as abnormal discretionary accruals) did not significantly change compared with pre-2006 long-tenure audit situations and voluntary post-rotation situations. Audit fees in the post-regulation period for mandatorily rotated engagements are significantly larger than in the pre-regulation period, but are discounted compared to audit fees for post-regulation continuing engagements. We also find that the observed increase in audit fees and audit hours in the post-regulation period extends beyond situations where the audit firm was mandatorily rotated, suggesting that the introduction of mandatory audit firm rotation had a much broader impact than the specific instances of mandatory rotation.
Data Availability: Most of the financial data used in the present study are available from the KIS Value Database. The data for audit hours and fees were drawn from statements of operating results filed with the Financial Supervisory Services (FSS) in Korea.
Using 41,648 firm-year observations from 30 countries during the period 2000–2011, we investigate the relation between analyst coverage and audit fees. We also examine whether the adoption of ...International Financial Reporting Standards (IFRS) and shareholder protection at the country level interacts with analyst coverage to affect audit fees. We find that auditors charge firms higher fees when the firms have greater analyst coverage. This supports our argument pertaining to analyst pressure. The positive impact of analyst coverage on audit fees is weaker for firms that adopt IFRS and in countries where there is high shareholder protection. This study enhances an understanding of the effect of analyst coverage on audit fees in relation to IFRS adoption and shareholder protection levels in an international setting.
This paper examines the impact of tax avoidance on the cost of debt and its interaction effect with shareholder activism. Using Korean firms, I find a negative relationship between tax avoidance and ...the cost of debt, supporting the trade-off theory. Further tests reveal that the negative relationship becomes stronger when the level of institutional ownership is high. It becomes even stronger after 1998, when the shareholder rights of institutional investors were strengthened. It suggests that the managerial opportunism theory has an additional explanation for tax avoidance activities. My findings indicate that tax avoidance reduces the cost of debt through trade-offs and creates a managerial rent diversion, which is mitigated in firms with larger institutional holdings.
Using the setting of chaebol industrial organizations in Korea, which allows for the study of a unique affiliation between a chaebol group and financial analysts, we examine whether investors react ...to an optimistic bias in affiliated analysts’ recommendations. Our initial market return tests, abnormal trading volume tests and independent analysts’ reaction tests suggest that investors and independent analysts recognize and discount an optimistic bias in chaebol-affiliated ‘buy’ recommendations. However, long-term market returns are more profitable in terms of affiliated analysts’ ‘buy’ recommendations than independent analysts’ recommendations, which suggests that investors excessively discount chaebol-affiliated ‘buy’ recommendations in the short-term.
This article proposes the abolition of the 50% capital gains tax (CGT) discount for personal taxpayers and its replacement with a non-cumulative annual tax-free threshold for the taxation of capital ...gains. This reform, it is argued, would considerably enhance the equity, efficiency and simplicity of the Australian CGT regime, as well as providing a positive revenue outcome for the Treasury.
This paper examines the accuracy and optimism of forecasts made by affiliated analysts compared to those made by independent analysts. Using Korean chaebol firms, we test the information-sharing ...hypothesis and the conflict of interest hypothesis. Our results show that the forecasts made by the affiliated analysts are less accurate and more optimistic than those made by the independent analysts. This finding is inconsistent with the information-sharing hypothesis but supports the conflict of merest hypothesis. The results also indicate that the forecast accuracy of affiliated analysts is not related to the internal sales transaction ratio or the idiosyncratic information of the group firms. We also find that the forecast accuracy of affiliated analysts increased after Regulation Fair Disclosure came into effect in 2002 in Korea, which finding is in disagreement with the information-sharing hypothesis. Our results reveal that the forecast inaccuracy and optimistic bias of the affiliated analysts are not directly related to the individual ownership relationship of the affiliated group firms with the forecasting firm. Our results provide further evidence of analysts' conflict of interest that arises from earnings-related intragroup propping behavior.
This paper examines whether tax avoidance substitutes for the use of debt, as well as investigating the impact of the tax-exhaustion effect and the cost of debt in this relationship. Applying a ...modified version of the tax-avoidance measure in Desai and Dharmapala (Rev Econ Stat 91:537–546,
2006
), I determine the marginal substitution effect of tax avoidance for the use of debt for a large sample of Korean firms, generalizing the evidence of Graham and Tucker (J Financ Econ 81:563–594,
2006
). Furthermore, I find that the debt-substitution effect increases with the probability of losing tax shields, suggesting that the tax-exhaustion effect interacts with the debt-substitution effect. In addition, the debt-substitution effect becomes stronger when the cost of debt is high, indicating that the cost of debt is a determinant of the substitution effect. The debt-substitution effects of tax avoidance suggest that tax-avoidance activities could offer a partial explanation for the underleverage puzzle.
The 50% CGT discount is a sizeable tax preference, introduced in 1999-2000, which has been the cause of lost tax revenue, and has compromised the important tax system design principles of horizontal ...equity and vertical equity. In this article, the 2019-20 2% individual taxpayer sample fifile and the aggregate taxpayer data from Taxation Statistics are analysed to gain some insights into the characteristics of taxpayers with capital gains. The data mining technique of cluster analysis is used to group similar taxpayers together based on selected tax return fifields. The analysis confifirms that the 50% CGT discount disproportionately benefifits a very small group of high income taxpayers with relatively large levels of capital gains. The abolition or reduction of the 50% CGT discount would improve the overall integrity of the tax system, as well as horizontal and vertical equity. The benefifits to the overall tax system of this reform would far outweigh any disadvantages that may apply to the small proportion of taxpayers who realise capital gains.
