“Impact of human resource characteristics of internal accounting system on post-earnings announcement drift: Evidence from Korea”

When companies invest in their internal accounting personnel, investors place greater trust in disclosed earnings information and highly regard a company’s information transparency. This results in prompt investment decisions regarding the company. Consequently, earnings information will be immediately reflected in stock prices, thereby reducing stock price drift. The purpose of this study is to examine the impact of investments in establishing and operating internal accounting systems on investors’ responses to the mitigation of stock price drift. The study focused on firms listed on the Korea Exchange from 2011 to 2018 and constructed a regression model using the cumulative abnormal return following earnings disclosure dates for 30, 60, and 120 days as the dependent variable, with the characteristics of internal accounting personnel as independent variables. The analysis reveals that companies with many internal accounting personnel and position experts, such as accountants, within their internal accounting control systems, experience a significantly lower stock price drift. The coefficients of the interaction terms between internal accounting personnel characteristics and standardized unexpected earnings are positive and significant at the 1% level for all cumulative abnormal return values. The findings of the study indicate that as efficiency is secured, stemming from the scale of personnel managing internal accounting control systems and their expertise, market investors’ understanding and trust of accounting information also increase. Investors, as information users, react promptly to the earnings information disclosed by the company, leading to a decrease in stock price drift.


INTRODUCTION
Companies' financial reporting systems are a major factor influencing capital market participants' decision-making; they play a role in ensuring that resources in the capital market are efficiently allocated (Jensen & Meckling, 1976).In response to a series of accounting scandals such as Enron and WorldCom, the U.S. introduced the Sarbanes-Oxley Act (SOX), emphasizing the need for enhanced mechanisms to monitor executive malfeasance.Among its provisions, Section 404 requires company management to establish and assess internal controls to improve the quality of financial statements, while mandating external auditors to review its adequacy.These measures highlight the prerequisites for an appropriate internal accounting control system to enhance the reliability of accounting information.Similarly, Korea introduced an internal accounting control system to boost the credibility of accounting information.Korean companies are required to include an operational report of their internal accounting control system alongside their annual report.This report includes information regarding the status of internal accounting management and operational personnel, and the presence of certified public accountants. 1  The caliber of personnel overseeing the operations of the internal accounting control system is closely related to accounting information quality produced by companies.Specifically, expanding personnel within the internal accounting control system and placing experts enhances the reliability of accounting information, alleviating information asymmetry both within and outside the company (Ashbaugh-Skaife et al., 2008; Choi et al., 2013a).Prior research findings highlight the importance of management's role in allocating personnel appropriately to internal accounting control systems.
Post-Earnings Announcement Drift (PEAD) refers to the phenomenon where stock prices move in the same direction as unexpected earnings following an earnings announcement (Ball & Brown, 1968;Jones & Litzenberger, 1970).Several studies have discovered a drift in stock prices following post-earnings announcements and have analyzed its causes.Their results show that capital market investors' lack of confidence in accounting information leads to a lag in stock price reactions (Abarbanell & Bernard, 1992;Bernard & Thomas, 1989).If corporate investment in internal accounting personnel leads investors to trust disclosed earnings information and consider a company's information as highly transparent, investment decisions about the company would be made promptly, instantly reflecting earnings information in stock prices and, thus reducing PEAD.This study anticipates that companies that employ more personnel and experts for internal accounting control systems will exhibit less PEAD than others.

LITERATURE REVIEW AND HYPOTHESIS
Since the temporary introduction of internal accounting control system regulations under the Corporate Restructuring Promotion Act of 2001, listed companies and association-registered corporations in Korea are required to include an "Internal Accounting Control System Operation Report" in their annual reports starting from 2002.This report includes a form detailing the "status of internal accounting management and operation personnel and certified public accountants."Regulatory agencies mandated this disclosure to enable stakeholders to assess companies' internal accounting control system efficiency.
Following the enactment of SOX, numerous studies have reported internal control weaknesses (Choi et al., 2013a).However, evaluating internal control levels solely based on reporting weaknesses can lead to binary thinking.Even among companies that have reported internal control weak-nesses, the effectiveness of these controls can vary (Choi et al., 2009).In this regard, data on the status of internal accounting personnel disclosed exclusively in Korea holds significance, as it allows for a continuum-based analysis of the effectiveness of internal accounting control systems.

Choi et al. (2013b
) analyzed the relationship between the size of internal accounting staff and the reporting of weaknesses in Korean companies.They found that companies with more personnel assigned to a system were less likely to report significant weaknesses.Moreover, Chae et al. (2012) argue that increasing the allocation of personnel and experts to a company's internal accounting control system enhances the reliability of its accounting information, thus reducing the problem of information asymmetry.
The study found that the effective operation of internal accounting control systems reduces information risk from an investor's perspective, lowering a company's capital costs, and ultimately increasing its value.
The phenomenon where abnormal returns move in the same direction as unexpected earnings following an earnings announcement is termed post-earnings announcement drift.This is a market anomaly where positive unexpected earnings correspond to positive excess returns, while negative unexpected earnings correspond to negative excess returns post-announcement.
In an efficient market, post-announcement stock prices should have no relevance to disclosed earnings information (Fama, 1970 announcement date.Instead, it drifts in the same direction as unexpected earnings in the period following an earnings announcement.Several previous studies have reported that this phenomenon occurs because investors in the capital market do not fully grasp the characteristics of announced earnings information, leading to an incomplete reflection in stock prices (Foster et al., 1984;Freemand & Tse, 1989).This implies that investors lack confidence in the disclosed information, delaying investment decisions and causing stock prices to drift.
This study focuses on the construction of internal accounting control systems that influence the transparency of corporate information and capital market trust in that information.It examines whether companies that proactively invest in internal accounting personnel mitigate stock price drift.
The purpose of an internal accounting control system is to prevent potential errors and fraud during the production of accounting information and provide investors with reliable information. 2Securing adequate personnel is essential for internal accounting control systems to operate effectively (Ge & McVay, 2005).Given the research findings that experienced practitioners perform tasks efficiently (Monks & Minow, 1995) and the Committee on Sponsoring Organizations (COSO, 2006) recommendation to place experts in internal accounting control systems, companies must increase their internal accounting staff and invest significantly in the system's construction and operation.Numerous previous studies have reported that companies with superior internal accounting personnel tend to have higher-quality accounting information and face lower information risk, leading to lower capital costs (Choi et al., 2013b;Kim et al., 2011).
Companies striving to operate an internal accounting control system effectively through investment in personnel are likely to have high-quality financial reporting.This enables investors to better understand the earnings information disclosed by such companies and easily predict future cash flows based on that information.Additionally, investors tend to highly evaluate the reliability of accounting information produced by companies with efficient internal accounting control systems (Kim et al., 2011).Consequently, they promptly reflect this information in stock prices at the day of the earnings announcement.Based on this, the following research hypothesis is formulated: Research Hypothesis: Companies that invest in internal accounting personnel experience a reduction in stock price drift following earnings announcements.

METHOD
This paper examines the investment level of internal accounting personnel from two perspectives: (1) number of internal accounting personnel and (2) placement of accountants within internal accounting control systems.
Data related to these aspects are manually collected from the "Status of Internal Accounting Management & Operation Organization Personnel and Certified Public Accountants" section in the "Internal Accounting Control System Operation Report" attached to the business report.Information regarding the characteristics of personnel overseeing internal accounting control systems is disclosed only in Korea.
To measure stock price drift, the study sets unexpected earnings (SUE) and cumulative abnormal returns (CAR) as dependent variables.First, the cumulative abnormal return is measured as the accumulated daily abnormal return (Abnormal Return, AR) over n days following the earnings announcement, as defined below.
( ) where The study calculates the daily abnormal return (AR) based on the market-adjusted return model.EPS − by the adjusted stock price at the end of the previous period ( ) The market's expected earnings are measured using a random walk model (Park & Lee, 2015).If a company's actual earnings are higher (lower) than the market's expected earnings, they are interpreted as positive (negative).However, when using SUE as a continuous variable, there is a possibility of bias owing to outliers.Therefore, following prior studies, this study uses the value of SUE that has been deciled (or divided into ten grades) (Lee & Lee, 2008;Park & Lee, 2015).
This study aims to verify whether companies that proactively invest in internal accounting personnel exhibit reduced post-earnings announcement drift compared to companies that do not.As such, this study sets the cumulative abnormal returns for 30, 60, and 120 days following the earnings announcement date as the dependent variable, and the level of internal accounting personnel and control variables as independent variables to constitute the regression model in equation (1).
, .To ensure sample homogeneity, only firms with a December fiscal year-end were considered.Stock and financial data were collected from the KIS-VALUE database.Firms with poor financial health owing to eroded capital were excluded.Earnings announcement dates, corresponding to shareholders' meeting notice dates, were sourced from the Financial Supervisory Services Electronic Disclosure System (DART).To control for the influence of outliers on the analysis, the variables were adjusted (winsorized) at the 1% extreme level.Thus, 4,813 firm-year observations were selected as the final sample.Table 2 presents the correlations among the main variables.Tables 2 and 3 display the continuous form of variables before ranking.SUE, which represents unexpected earnings, shows a significant positive correlation with CAR (10), CAR (20), CAR(30), and CAR(40).This indicates that stock prices continue to react in the same direction as unexpected earnings after the earnings announcement, implying the presence of a post-earnings announcement drift in the Korean market.The primary variables of interest, ICP -the scale of internal accounting personnel -and ICP2 -the deployment of professionals in internal accounting systems -show negative correlations with the CAR variables; however, only ICP2 is significant for CAR(30) and CAR(40).Moreover, larger firms with higher profitability (ROA) tend to employ accountants in their internal accounting systems.This aligns with prior research on internal accounting systems (Ge & McVay, 2005).

RESULTS
Tables 3 and 4 display the regression results for the hypothesis testing.Data on the characteristics of internal accounting personnel, such as size and placement of accountants, are disclosed only by Korean listed firms.Therefore, this study was conducted targeting only Korean firms.If firms that invest heavily in internal accounting systems personnel experience a reduction in post-earnings announcement drift, the interaction terms DSUE×DICP1 and DSUE×ICP2 should show a significant negative coefficient, α3.Cumulative abnormal returns following the earnings announcements for 10, 20, 30, and 40 days were employed.
The results in Tables 3 and 4 show that the regression coefficient of DSUE, the ranked value of unexpected earnings, is positive and significant at the 1% level for all CAR values.This result indicates that even after the earnings announcement, cumulative abnormal returns  In Table 3, the coefficient of the interaction term between DSUE and DICP1 (DSUE×DICP1) is negative and significant at the 1% level for all CAR values.Specifically, it was found that as the size of internal accounting personnel increases, market abnormalities such as stock price drift decrease.This can be interpreted as the larger the size of the internal accounting staff, the more efficiently internal accounting work is carried out, increasing the reliability of information and lowering information asymmetry between the inside and outside of the firm.In Table 4, the coefficient for the interaction term between DSUE and IC2 (DSUE×IC2) also displays significant negative values for all CARs.
In other words, it was confirmed that the more firms deploy professional personnel such as accountants within their internal accounting system, the more the stock price drift phenomenon decreases.The result means that as the expertise of internal accounting personnel is secured, the reliability of information improves and investment decisions by market investors can be made quickly after earnings disclosure.
For further analysis, this study verified whether a negative (-) relationship exists between the competence of internal accounting person-nel and the stock drift phenomenon, considering varying levels of corporate information asymmetry.The level of corporate information asymmetry was measured using the standard deviation of stock returns.A greater disparity in information between company insiders and outsiders tends to lead to increased investor discrepancies, resulting in higher standard deviation of stock returns (Hutton et al., 2009).The standard deviation of weekly stock returns was used as a proxy for the level of information asymmetry.Companies with a standard deviation greater than the median were categorized as the high information asymmetry sample, whereas those below were defined as the low information asymmetry sample.Previous studies suggest that a robust internal accounting system effectively controls corporate earnings management in situations with high information asymmetry (Ge & McVay, 2005).Therefore, the study expects a significant negative value for the regression coefficient α3 of the interaction term between unexpected earnings rankings (DSUE) and the size ranking of internal accounting personnel (DICP1) in the high information asymmetry sample.The results revealed that the coefficients of the interaction term DSUE×DICP1 were -0.748, -0.736, -0.730, and -0.702, respectively, each significant at the 1% level for cumulative abnormal return variables (CAR (10), CAR (20), CAR(30), and CAR(40)).In contrast, in the low information asymmetry sample, the coefficients were not significant, and over time, they even indicated an inducing effect on stock drift.

DISCUSSION
The main results from Tables 3 and 4 support the study's hypothesis that firms with a larger number of internal accounting personnel and those employing professionals, such as accountants, within their internal accounting systems experience significantly lower post-earnings announcement drift than other firms.If the quality and trustworthiness of a firm's disclosed accounting information are low, investors may not accurately interpret a firm's earnings information or reflect it promptly, leading to stock price drift following earnings announcements.The finding that firms investing in internal accounting personnel experience reduced post-earnings announcement drift suggests increased efficiency and expertise gained through the expansion of internal accounting teams, leading to improved investor understanding and trust.Consequently, investors re-act more promptly to the earnings information disclosed by these firms, resulting in reduced post-earnings announcement drift.
Previous studies have judged the effectiveness of the internal accounting system based on whether there are weaknesses in internal control.Unlike the fact that the effectiveness of the system can only be measured dichotomously when using whether or not significant weaknesses in the internal accounting system have been reported, when using the data on the characteristics of personnel in charge of the internal accounting system, the effectiveness of the system can be analyzed along a continuum.Therefore, this study has the distinction of intuitively verifying the effectiveness of the internal accounting system by using publicly disclosed data on internal accounting personnel provided only by Korean firms.This study examined the impact of the characteristics of internal accounting personnel on the decision-making speed of market investors.The results of this study suggest that excellent internal accounting personnel ultimately promote quick investment decisions by market investors.As a follow-up study, this study proposes to examine how the characteristics of internal accounting personnel affect the shortand long-term investment efficiency of market investors.If market investors' investments are quickly implemented based on highly reliable information, investment efficiency is expected to increase.

CONCLUSION
The purpose of this study is to examine the impact of investments in establishing and operating internal accounting systems on investors' responses, considering that their primary objective is to enhance accounting transparency.Specifically, the paper explored how stock drift phenomena manifest based on the characteristics of personnel who operate internal accounting systems.If financial reporting quality improves through efficient operations based on such investments, it should help alleviate abnormal phenomena owing to uncertainties in corporate information perceived by investors in the capital market.
The findings revealed that companies that maintain larger internal accounting staff and place experts, such as accountants, within their internal accounting systems experience significantly lower stock drift phenomena than those that do not.The study's results imply that as efficiency -derived from the size of internal accounting personnel and their expertise -increases, investors' understanding and trust in accounting information also increase.Consequently, investors react more promptly to earnings information disclosed by these companies, leading to reduced stock drift.
The contributions and expected impacts of this study are three-fold.First, by examining how securing sufficient personnel and placing experts within the internal accounting system can reduce stock drift, this study suggests that managers must invest in internal accounting personnel.Second, while prior studies have highlighted the effect of accounting information quality on stock drift, this study focuses on internal accounting personnel producing such information.Finally, the results serve as empirical evidence of the efficacy of mandatory disclosures regarding internal accounting personnel in Korea.Such data is exclusively provided in Korea; financial authorities have mandated these disclosures to enable external stakeholders to assess the effectiveness of internal accounting systems.The findings suggest that capital market investors can use internal accounting personnel data as a reference when evaluating a company's value.

CAR10 1 ICP2
Cumulative abnormal return observed from the day following the earnings disclosure through the next 10 days CAR20 Cumulative abnormal return observed from the day following the earnings disclosure through the next 20 days CAR30 Cumulative abnormal return observed from the day following the earnings disclosure through the next 30 days CAR40 Cumulative abnormal return observed from the day following the earnings disclosure through the next 40 daysIndependent VariablesICP1Size of internal accounting personnel, number of internal accounting management personnel/ number of executives and employeesDICP1Ranking value of internal accounting personnel size between 0 and Whether accountants (professional personnel) are deployed in the internal accounting system SUE Standardized unexpected earnings DSUE A value between 0 and 1 as a sequence value of standardized unexpected earnings SIZE A natural logarithm of firm market value DSIZE A value between 0 and 1 in the hierarchy of firm size LEV Debt ratio, total debt/ total assets DLEV A value between 0 and 1 in the order of the debt ratio MB Book Value to Market Value Ratio DMB A value between 0 and 1 as a sequence value of growth potential ROA net income/total assets DROA A value between 0 and 1 as a pecking order of profitability

Table 1
presents the descriptive statistics of the sample.The mean CAR 10, 20, 30, and 40 days after the announcement date of the annual general

Table 4 .
Investment in internal accounting personnel and stock price drift (focusing on whether or not experts are included in the system) All continuous variables are winsorized at the 1% level.(4) Variable definitions are presented in Appendix A. http://dx.doi.org/10.21511/imfi.20(4).2023.30

Table 5 .
Investment in internal accounting personnel and stock price drift (comparison of companies with high information asymmetry and companies with low information asymmetry)