Fraud Firms and the Matching Principle: Evidence from Korea

  • Jooyeon Hong Sungkyunkwan University
  • Wonsun Paek Sungkyunkwan University
Keywords: firms, fraud, Korea

Abstract

This paper examines whether the degree of matching for poor-performing fraud firms varies depending on the strength of the causal relation between expenses and revenues. A stronger causal relation exists between revenues and operating expenses than between revenues and total expenses that include non-operating expenses as well as operating expenses. Fraud firms have stronger incentives for managing earnings. Given that managing earnings is easier when using non-operating items than when using operating items, the degree of matching is (not) lower for fraud firms than for non-fraud firms at the strong (weak) level of the causal relation between revenues and expenses. Empirical results suggest that the degrees of matching are different between fraud and non-fraud firms only at the strong level of the causal relation between revenues and expenses. This result implies that the investigation of the matching model at a strong level of the causal relation between revenues and expenses is more effective than that at a weak level of the causal relation, with regard to examining the degree of matching for fraud firms. This study contributes to the literature by providing evidence on the importance of the level of the causal relation when examining the degree of matching. 

Author Biographies

Jooyeon Hong, Sungkyunkwan University

HONG, Jooyeon is a Doctoral student in the Accounting Department, School of Business, Sungkyunkwan University. She is a CPA in Korea and USA. She had worked for Deloitte accounting firm. Her research interests are Auditing, Earnings Management, and Accounting standards.
    Author’s contact details: School of Business, Sungkyunkwan University, Seoul, 110-745, Korea; e-mail: jooyhong@skku.edu

Wonsun Paek, Sungkyunkwan University

PAEK, Wonsun is a Professor of Accounting at School of Business, Sungkyunkwan University, Seoul, Korea. He earned his Ph.D. from Temple University, U.S. His research interests include valuation, earnings quality, conservatism, and accrual anomaly. He published more than sixty papers some of which have been published in Journal of Accounting, Auditing, and Finance, Accounting Horizons, Asia-Pacific Journal of Accounting and Economics, and Korean Accounting Review. 

References

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Published
2014-06-28
How to Cite
Hong, J., & Paek, W. (2014). Fraud Firms and the Matching Principle: Evidence from Korea. Gadjah Mada International Journal of Business, 16(2), 167-183. Retrieved from https://dev.journal.ugm.ac.id/v3/gamaijb/article/view/15466
Section
Articles