A Study on the Association between Firm’s Overinvestment and Voluntarily Appropriated Retained Earnings

Pyung Kyung Kang ; Yoo Chan Kim

(First Author) Sogang Business School, Sogang University pkang@sogang.ac.kr
(Corresponding Author) College of Business and Economics, Hanyang University, ERICA Campus uchanacct@hanyang.ac.kr

기업의 과잉투자와 임의적립금 간의 관련성에 대한 연구

Copyright 2011 THE KOREAN ACADEMIC SOCIETY OF BUSINESS ADMINISTRATION
This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This study aims to examine the association between firm’s overinvestment and voluntarily appropriated retained earnings. Prior studies provide the theory and evidence that overinvestment can lead to an overall increase in retained earnings. With regard to overinvestment practice, however, whether the part of retained earnings is to be reserved as voluntarily appropriated retained earnings is still not fully answered, calling for further investigation. Using data of firms listed on the KOSPI market from 2014 to 2018, this study finds that overinvestment is significantly and positively associated with the level of voluntary reserves. This study also finds that overinvestment has a significant and positive association with the number of reporting items for voluntary reserves. Interestingly, the study further finds that the positive relationship between overinvestment and voluntary reserves level is significant only for non-growth related reserves. The results from additional analysis utilizing a combined measure are consistent with the main results. The findings from this study suggest that the overinvestment is an important driver that can affect firm’s management of voluntarily appropriated retained earnings.

Keywords:

Voluntarily Appropriated Retained Earnings, Retained Earnings, Overinvestment, Dividend Policy, Pecking Order Theory

Acknowledgments

We thank Heegoo Kang, a research assistant at the College of Business and Economics, Hanyang University (ERICA Campus), for helping us in data collection.

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∙ The author Pyung Kyung Kang is a Professor of Accounting at Sogang University, Seoul, South Korea. Before joining Sogang University, he served as an Assistant Professor at Wayne State University, MI, USA. He earned his Ph.D. in Management (Accounting) from the Rutgers Business School at Rutgers University and his Master of Professional Accountancy from the Kelley School of Business at Indiana University Bloomington. His primary research interests are focused around financial accounting and capital markets including corporate disclosure, market anomalies, earnings management, and corporate governance.

∙ The author Yoo Chan Kim is a Professor of Accounting at the College of Business and Economics, Hanyang University (ERICA Campus) in South Korea. He earned his Ph.D. in business administration from Sogang University in South Korea. His research primarily focuses on accounting choice, audit quality, and corporate governance.