Earnings management by controlling shareholders who plan for stock gifts: Korean evidence

Su Jeong Lee, Sung Ook Park and Woon-Oh Jung

Asia-Pacific Journal of Accounting & Economics, 2018, vol. 25, issue 3-4, 313-329

Abstract: We examine whether controlling shareholders who plan for stock gifts would manage earnings in an attempt to depress stock prices prior to gifting stocks to related parties. Gift taxes are levied based on the average market value of the stock transferred for a certain period known as the valuation period. This process enables controlling shareholders to be incentivized to depress stock prices during this period and thereby alleviate tax burden. We discover that the firms that have stock gift transactions in the sample significantly decrease their discretionary accruals in the quarters that precede and/or overlap with the valuation period. Earnings management that decreases income is statistically significant when stock gifts are made for individuals who are the related parties and family members of controlling shareholders. By contrast, we do not observe a similar earnings-management behavior in cases where stock gifts are donated to institutional donees who are not subject to gift taxes.

Date: 2018
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DOI: 10.1080/16081625.2017.1322909

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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