2008. 8

1. Timeliness and Informativeness of Fair Disclosure: Evidence from Korean Preliminary Financial Reports by Inman Song Yonhee Park Dong-Hoon Yang Mahmud Hossain 2008. 8

2. Backgrounds of the Study(I) Regulation of Fair Disclosure (Korean and US SECs) • To prohibit “selective disclosure” of material • nonpublic information by listed firms • To level the playing field for all investors by • mandating more timely disclosures that serves to • preempt insiders’information advantage

3. Backgrounds of the Study(II) Current Korean Regulations for Disclosures System • Securities Exchange Act Article 191-10, 3 • Regulations on listed company Article 4-2 Preliminary Financial Reports (PFR) Sales revenue, operating income or net income of the recent fiscal year has changed more than 30% Should be disclosed only prior to the “public notice date” (of shareholders’ meeting)

4. Backgrounds of the Study(III) Submission date (of financial statements to auditors) Closing date Date of shareholders’ meeting Audit report date (at which the firm receives audit reports) Public notice date (of share-holders’meeting) Filing date (of audit report to shareholders) Possible period of releasing PFRs

5. Backgrounds of the Study(IV) Problems with Current FD Regulations • PFR can be disclosed before “public notice date” • that is followed by “audit report date” • As a result, firms may release PFRs even after • “audit report date” without violating the • regulation •  May preempt the informativeness of PFR and • invalidate the effectiveness of the regulation

6. Research Questions • (Timeliness of FD) • Do Korean firms comply with the FD regulation requiring prompt notification of information about material changes in their financial performance? • (Informativeness of FD) • Are there differential market reactions to different timings of PFR disclosures?

7. Related Literature(I) • Grant (1980) • Finds that annual earnings announcements of OTC firms (with less amount of interim information) appear to possess more information content than those of NYSE firms • The information of the annual earnings announcement is • anticipated by the market prior to the date of release due to • the existing interim sources of information (as an alternative • form of PFR)

8. Related Literature(II) • Firth (1981) • Finds that week of the preliminary announcement gives the highest weekly level of “information” • Preliminary reporting pre-empts insider trading by putting • in the public domain information which would otherwise be • in the public domain

9. Related Literature(III) • Opoong (1995 & 1996) • Document that significant price response to the release of UK annual preliminary reports occur in hour (or day) in which the report is released • Preliminary reports are still value relevant in spite of reliability • problems due to these reports not to subject to third party • certification

10. Related Literature(IV) • Song (1989), Jang and Cheon (2003) Finds that substantial information is conveyed to the stock market by the release of voluntary preliminary annual financial reports In contrast, information released at the annual shareholders’ meeting, which is subsequent to the release of preliminary annual financial reports, does not appear to give significant information to investors

11. Related Literature(V) • Difference with Prior with Literature • With respect to addressing potential preemption of actual earnings information of preliminary announcements, prior studies employ a firm’s annual announcement in its different stages: • - public notice date (Firth, 1981) • - date of shareholders’ meeting (Grant, 1980; Firth, • 1981; Song, 1985; Jang and Cheon, 2005) • Failed to identify the earliest announcement date • of actual (i.e., certified) earnings to assess the • effectiveness of purported disclosure regulation

12. Empirical Model Cart (-1,0,1) = a1 + a2 PUEt + a3DBPFR*PUEt + a4DNEG*PUEt + a5SIZEt + a6~8YD + et where, CAR(-1,0,1): cumulative abnormal return from “day -1” to “day +1” (“day 0” day on event day) PUE : unexpected PFR earning, (PFR NIt– actual NIt-1 )/ pricet-1 DBPFR : 1 if PFR is disclosed before audit report date, 0 otherwise DNEG : 1 if net income is negative, 0 otherwise SIZE: log(total market pricet-1) YD: year dummies

13. Sample and Data Description of Sample Selection Procedure

14. Results: Timing of Disclosures(I) PFR Reproting Lag (N= 1,219)  604 (50%) sample firms release PFRs even after the audit report date

15. Results: Timing of Disclosures(II)Over- vs. Under-estimation of PFR earnings Why tendency of late PFR disclosure?More than half of sample firms (628) over- or under-estimate preliminary earnings , which may create unnecessary disclosure-related legal liability 1,219 628

16. Results: Market Test(I) Market Reaction to Unexpected PFR Earnings around PFR Release Date  PFRs convey information to stock market only if they are disclosed prior to audit report date

17. Results: Market Test(II) Market Reaction to Unexpected Actual Earnings around Audit Report Date  The informativeness of unexpected actual earnings is warranted only when audit report date proceeds PFR release date

18. Summary and Conclusions • Half of sample firms release PFRs after the audit report date. •  PFRs are not preliminary any more since external auditing processes are substantially completed at audit report date • PFRs have information contents only if they are disclosed prior to audit report date. •  Consistent with the conjecture that timeliness increases the informativeness of PFR disclosure(by curbing insiders’ ability to potentially profit from their information advantages)

19. Implications for Accounting Policy Makers • Current regulation for PFR in Korea may not be effective to fulfill its main objective •  Necessary to amend current regulation to require that PFRs be released well before independent auditors complete the audit