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Management of Revenue and Earnings in Korean Firms Influenced by Cognitive Reference Points

Author

Listed:
  • Michael Lacina

    (Department of Accounting, University of Houston-Clear Lake, 2700 Bay Area Boulevard, Houston, TX 77058, USA)

  • B. Brian Lee

    (Department of Accounting, Finance, & MIS, Prairie View A & M University, P.O. Box 519, MS2310, Prairie View, TX 77446, USA)

  • Dong Wuk Kim

    (Jeju National University, 1, Arail-dong, Jeju-si, Jeju-do, South Korea)

Abstract

We investigate how Korean officers manage revenue and earnings to achieve cognitive reference points (round up). In Korea, revenue has traditionally served as one of the key financial statement figures. Thus, we study revenue management around cognitive reference points both in isolation and to influence earnings around cognitive reference points through a chain effect. Our study compares the distributions of the second (from the left) and first digits in revenue and various proxies for earnings with their corresponding Benford distributions (Benford, 1938). Also, we perform a logistic regression analysis and compute probabilities based on this analysis. The results show that revenue observations have more first digit 1’s and second digit 0’s and fewer first and second digits 9’s than under a Benford distribution. Korean managers appear to round up revenues with high second digits to improve first digits. In addition, we document that revenue observations with second digits of 0 are associated with higher proportions of positive earnings (gross margin and earnings from operations) with second digits of 0. This suggests that Korean firms simultaneously convert the second digits of revenue and earnings to improve the first digits of those numbers. Results from additional tests convey more upward management of the second digit of revenue for firms that have characteristics that indicate higher ex ante benefits and stronger ex post effects from revenue management.

Suggested Citation

  • Michael Lacina & B. Brian Lee & Dong Wuk Kim, 2018. "Management of Revenue and Earnings in Korean Firms Influenced by Cognitive Reference Points," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-36, June.
    • Handle: RePEc:wsi:rpbfmp:v:21:y:2018:i:02:n:s0219091518500121
    DOI: 10.1142/S0219091518500121
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    References listed on IDEAS

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