Is Earnings Management in the South Korean Defense Industry Sustainable?

Kyoungkook Lim and Giseok Nam
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Kyoungkook Lim: College of Business, Hankuk University of Foreign Studies, 107, Imun-ro, Dongdaemun-gu, Seoul 130-791, Korea
Giseok Nam: College of Business, Hankuk University of Foreign Studies, 107, Imun-ro, Dongdaemun-gu, Seoul 130-791, Korea

Sustainability, 2017, vol. 9, issue 11, 1-11

Abstract: Recently, the defense industry in South Korea has been regarded with strong suspicion since a company responsible for producing parts for the aviation sector is being investigated for cost irregularities. Many people are concerned about these issues and the government is distrustful of defense industries. If the current situation continues, the defense industry market in South Korea (henceforth “South Korea”) will be hard to maintain. The South Korean government will have to rely on importing from abroad instead of buying products in the local market. This study looked at the sustainability of earnings management adopted in the defense industry of South Korea, exploring options for the government to maintain the scheme’s soundness. In particular, we used Kothari’s discretionary accrual as a proxy of earnings management and OLS method to analyze the relationship between them. The results are as follows. Firstly the firms with a high percentage of defense sales showed significant discretionary accruals; the higher the profit, the more likely it was that earnings adjustments were made; secondly, firms that had been certified by the government for defense cost-management were proven to be effective, because the earnings management activities were low compared to those of firms that did not have the defense cost-management certification; lastly, based on the accounting rules for the cost of defense products, it was found that significant results confirming defense firms were exercising their influence, through earnings management, on the improvement of the government system.

Keywords: information asymmetry; defense industry; defense cost; defense cost-management system certification (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2017
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