Heejeong Shin

This study examines the consequences of International Financial Reporting Standards (IFRS) adoption in terms of the investor perception of earnings quality in the Korean stock market. Building on evidence from Ecker et al. (2006) suggesting that return-based earnings quality (E-loading), as captured by the sensitivity of stock returns to accounting information risk, accurately represents investor perceptions of earnings information risk, the authors examine whether E-loading is different between the pre- and post-IFRS adoption periods. Using KSE-listed firms from 2006 to 2014, the authors find the evidence that the extent of stock return sensitivity to information risk embedded in financial statements is greater in the period of post-IFRS adoption than in the period of pre-IFRS adoption. This finding indicates that even though accounting-based earnings quality improves after the adoption of IFRS, investors perceive earnings information after the adoption of IFRS as riskier than before. In addition, the difference in investor perception is more pronounced for firms with low accruals quality as captured by discretionary accruals, indicating that the effect of IFRS adoption on return-based earnings quality is distinctive from that on accounting-based earnings quality. The paper contributes to the literature on IFRS by exploring the effect of IFRS adoption through a new perspective on earnings quality in capital market.

Building on a prior study that documents that stock price crashes are positively associated with firm-specific investor sentiment (hereafter, the sentiment), this study further investigates the moderating effect of foreign investors on Korea’s stock market. This study hypothesizes that foreign investors as sophisticated participants are indifferent of the significant relationship between the sentiment and the stock price crashes. For firms listed on the KSE over the period of 2011–2019, the analysis findings show that the high stock crash risk attributable to the high sentiment is attenuated for firms with high foreign ownership. However, such moderating effect of foreign ownership disappears when taking foreign investment horizon into consideration. This implies that future stock crash risk reduction under the high sentiment is due to the corporate monitoring role of foreign investors, who are targeting a long-term investment horizon. This study adds to the literature on the role of foreign investors by suggesting that foreign investors act as a rigorous monitor helpful for managing stock price, rather than a price maker who is rational under the high sentiment.