Accrual Quality and Opportunistic Seasoned Equity Offering in the Korean Stock Market

Abstract

We examine accrual quality (AQ) and its relationship with opportunistic seasoned equity offering (SEO) in the emerging Korean stock market. According to our empirical results, SEO firms with lower AQ tend to show higher abnormal returns around SEO announcement and significantly lower long-term performance after SEO. These results are more evident for SEO firms in which influence of institutional investors is weak. These findings suggest that poor AQ may be an important predictor of incentive for opportunistic SEOs and that the incentive may strengthen when institutional investors’ monitoring role weakens.

Key Words:

• accrual quality
• information asymmetry
• opportunistic behavior
• seasoned equity offerings

Acknowledgments

The authors thank Editor Ali M. Kutan and two anonymous referees for their highly constructive comments.

Notes

1. Many studies have documented that individual investors’ trading behaviors and performance tend to be poor. See, for example, Amihud and Li (2006), Barber and Odean (2000), Choi and Sias (2012), Chung (2014), Gibson et al. (2004), Grinblatt and Keloharju (2000), Han and Chung (2013), and Nofsinger and Sias (1999).

2. This implies that corporate events in Korea’s financial market are strongly influenced by individual investors. For example, Kim and Byun (2010) document that the market response to stock-split announcements in Korea’s stock market is strongly influenced by individual investors’ trading behavior.

3. Agency theory suggests that investors (principals) delegate a firm’s material decisions to a manager (agent) but that differences in their goals and vision increase agency costs because it is difficult for investors to verify what managers actually do (Jensen and Meckling 1976).

4. Seasoned equity offerings (SEOs) become more frequent after late 2004 as institutional investors participate more actively in Korea’s capital market. Before then, Korean firms typically relied on debt financing. Therefore, we specifically consider the sample period from 2005 to 2010.

5. Akron (2013) documents that the information asymmetry surrounding SEO firms is also an important issue in Israel’s stock market.

6. Earnings management is frequently observed in emerging Asian markets. For example, Huang and Lin (2007) and Wu et al. (2012) discuss earnings management in the Taiwan market.

7. In Korea’s stock market, listed firms are generally classified into firms listed on KOSPI (Korea Composite Stock Price Index) and those listed on KOSDAQ (Korea Securities Dealers Automated Quotations). KOSPI firms are typically large firms, whereas KOSDAQ firms tend to be small- and medium-sized firms. The listing requirement for KOSDAQ is less stringent than that for KOSPI, and therefore less-established small- and medium-sized firms and venture firms tend to be listed on KOSDAQ.

8. Twenty-four-month buy-and-hold abnormal returns (BHARs) based on matching firms are calculated as follows:

$\mathrm{B}\mathrm{H}\mathrm{A}{\mathrm{R}}_i\left(t1,t2\right)={\prod }_{t1}^{t2}(1+R_{i,t})-{\prod }_{t1}^{t2}(1+R_{matchingfirm,t}).$

9. Institutional ownership data would better capture the effect of institutional monitoring. However, access to institutional ownership data is limited in the Korean stock market, and only daily institutional trading data is reported in the market. Firms reported the level of institutional ownership only until 2006. Hence, we had to utilize the institutional trading data instead. Although unreported for brevity, we construct the variable for institutional trading as yearly institutional trading volume divided by yearly aggregate trading volume and find that the variable is highly correlated with institutional ownership data before 2006.

10. Loughran and Ritter (1995) propose the underreaction hypothesis for the long-term underperformance of SEOs. This hypothesis suggests that investors partially process information around the SEO announcement date, and thus the stock price partially reflects this information. Some additional price adjustment by incorporating the remaining content of information causes underperformance in the long term.