Yong-Sang Woo

This study investigates the relation between tax avoidance and discretionary expenses. The object of this study is to present the empirical evidence on whether additional cash from tax avoidance is used on discretionary expenses. Tax avoidance is estimated using the model suggested by Desai and Dharmapala (2006). Discretionary expenses are estimated using the index suggested by Roychowdhury (2006), which are selling and administrative expenses except taxes and dues, depreciation expenses, amortization expenses, rent expenses and insurance expenses because the management cannot manage these expenses discretionarily. Research expense and ordinary development expense are included in discretionary expenses. The empirical results of this study are as follows. First, tax avoidance is positively associated with discretionary expenses. This result means that the management spends additional cash from tax avoidance on discretionary expenses. Second, the ownership percentage of foreign investors weakens the positive relation between tax avoidance and discretionary expenses. This result suggests that foreign investors monitor the management’s discretionary decision effectively. Third, the positive relation between tax avoidance and discretionary expenses is weakened as the ownership percentage of a major stockholder increases

This study empirically investigates the effect of a CEO turnover on audit report lag (ARL), discretionary report lag (DRL) and total report lag (TRL). The object of this study is to provide empirical evidence for the responses of both the CEO and the external auditor on audit risk increases and information asymmetry that occur as a result of a CEO turnover. According to the previous study on CEO turnovers, the CEO turnover would increase audit risk and information asymmetry (Sohn et al., 2014). In this situation, the CEO has an incentive to provide timely information to decrease the monitoring costs and cost of debt (Lee et al., 2008). It is expected that an external auditor spends a large amount of time on audit procedures to lower the audit risk when the CEO changes. Therefore, the CEO turnover would have a conflicting effect on the ARL and DRL.
The results of the analysis are as follows. First, the ARL increases and DRL decreases when the CEO changes, which suggests that an external auditor spends a great amount of time on audit procedures to lower the audit risk because the audit risk increases when the CEO changes. A new CEO provides information faster to reduce monitoring costs and cost of debt that occur due to information asymmetry. Second, the ARL increases and DRL decreases as the frequency of CEO turnover increases. An external auditor would estimate the audit risk as being high if the CEO changes more frequently. To lower the audit risk to an acceptable level, many audit hours are spent on audit procedures by an external auditor, which increases the ARL. A new CEO has an incentive to provide timely information when the CEO changes more frequently. Thus, the DRL decreases as the frequency of CEO turnover increases