A Study on the Usefulness of Preliminary Earnings Disclosure: Focusing on the Reversal of Reported Earnings Signs and Earnings Management

Purpose This study investigates the propensity of managers to adjust discretionary accruals in response to sign changes in preliminary earnings at the provisional settlement stage. The research specifically aims to explore whether these sign changes serve as incentives for managers to manipulate accounting figures. Methodology The study utilizes an empirical approach, focusing on 5,945 KOSPI and KOSDAQ listed companies that disclosed their preliminary earnings from 2013 to 2019. It examines the impact of sign changes in preliminary earnings on discretionary accruals and further investigates whether companies that over－report their preliminary earnings with a sign change exhibit larger increases in discretionary accruals. Findings The findings indicate that discretionary accruals increase when preliminary earnings turn negative and decrease when they turn positive. This suggests that managers are likely to adjust earnings when an anticipated accounting profit sign change may result in a loss. Moreover, regardless of the direction of the sign change, an over－reporting of preliminary earnings is associated with a significant increase in discretionary accruals. Implications While preliminary earnings announcements enhance timeliness and usefulness, there is a risk of reduced reliability due to managerial optimistic bias. Understanding the reliability of these announcements in advance can provide more relevant information to external users. Despite the challenge in discerning optimistic decision－making at the provisional settlement stage, this study demonstrates the significant relationship between sign changes in preliminary earnings and discretionary accruals, thus contributing valuable insights to the field of accounting.