Company’s Sustainability and Accounting Conservatism: Firms Delisting from KOSDAQ
Round 1
Reviewer 1 Report
This paper addresses an interesting topic, the relationship between delisting firms and accounting conservatism.
Specifically, it investigates whether or not delisting firms are more conservative. The authors examine the research question using piecewise linear accruals models. The main strength of the study is the approach used to address the research questions (i.e., using multiple proxies of accounting conservatism). It is interesting to explore the timeliness of loss recognition of delisting firms from the KOSDAQ market as regulatory concerns are rising. I believe that this paper has a good potential. However, there a few issues that the authors need to address before the potential of this paper can be fully assessed.
Study design:
- The authors should include the firm characteristics known as determinants of accounting conservatism (e.g., firm size, leverage, market to book ratio, etc.) in the Ball and Shivakumar’s or Basu’s piecewise linear models. The authors should show if the results are qualitatively similar even after control variables are included in the models.
- In Table 5, 7, and 9, the authors do not report all lower-level interactions in the regressions. For example, the authors estimate the model (1) and (2) to test hypothesis 1. Because the four-way interaction terms (DELISTit×BIG4it×CFOit×DCFOit ) are the key variables of interest, the authors should include all lower-level interactions (i.e., DELISTit×BIG4it, BIG4it×CFOit, & BIG4it×DCFOit) to avoid the change in their meaning. Alternatively, the authors may test the hypotheses using the models excluding the four-way interaction terms for two separate samples (i.e., firms audited by Big4 vs. firms audited by non-big4) and statistically compare the results.
Author Response
Authors’ Response to Reviewers’ Comments
We thank editor and all reviewers for insightful comments on our manuscript. They were invaluable in stimulating new thinking and affording perspective on this paper. Resolving issues you raised permitted us to make what we believe are substantial improvements in the coherence and persuasiveness of the manuscript. In the revised manuscript, all the sentences rewritten are in red letters to help your understanding of what are changed. Below, we reproduce selections from your comments (in Italics), and provide our responses (in blue letters).
Reviewer1 wrote: The authors should include the firm characteristics known as determinants of accounting conservatism (e.g., firm size, leverage, market to book ratio, etc.) in the Ball and Shivakumar’s or Basu’s piecewise linear models. The authors should show if the results are qualitatively similar even after control variables are included in the models.
Thank you for bringing this issue to our attention. As you suggested, in the revision (in table 8 and 9), we control for these variables (such as leverage, and Altman Z) in the regressions, and the result does not change. We argue whether firm size and PPE are two different concepts in the sense that firm size is a total construct and PPE is a tangible asset-based construct. However, we cannot add firm size variable because we think that there is a correlation problem between size and PPE.
Reviewer1 wrote: -In Table 5, 7, and 9, the authors do not report all lower-level interactions in the regressions. For example, the authors estimate the model (1) and (2) to test hypothesis 1. Because the four-way interaction terms (DELISTit×BIG4it×CFOit×DCFOit ) are the key variables of interest, the authors should include all lower-level interactions (i.e., DELISTit×BIG4it, BIG4it×CFOit, & BIG4it×DCFOit) to avoid the change in their meaning. Alternatively, the authors may test the hypotheses using the models excluding the four-way interaction terms for two separate samples (i.e., firms audited by Big4 vs. firms audited by non-big4) and statistically compare the results.
Based on your comment, we control for these variables in the regressions, and the result does not change. Please refer to footnote 6 on p.11 for more discussions.
Reviewer2 wrote: - Please the structure of your paper can be improved. Please re-structure as follows: (i) Introduction; (ii) Background; (iii) Theoretical literature review; (iv) Empirical literature review and hypotheses development; (v) Research design; (vi) Empirical results and discussion; and (vii) Summary and conclusion. Please refer to the papers below for guidance on how to better structure your paper. Background - please outline clearly background issues relating to the Korean context. Highlight specific features in Korea that renders it interesting to situate your study on. Theoretical literature review - please identify and engage in explicit discussions of your theoretical framework in a separate section. Empirical literature review and hypotheses development: please re-structure the development of your hypotheses. For each hypotheses, please first outline the theoretical link. Second, outline the prior empirical findings. Third, present any contextual insights and finally, set up your hypotheses. Please refer to the papers below for guidance on this. Empirical results - please present them as follows. For each hypotheses, state what the findings are. Second, indicate whether the relevant hypothesis is supported or not. Third, compare and contrast the findings with those of prior theoretical and empirical studies. Fourth, highlight any implications of your study. Summary and Conclusion - please rewrite that by expanding discussions relating theoretical and practical implications of your study.
Thank you for your suggestion. In the revision, we re-structured our paper as your suggestion. Also, we tried to faithfully reflect your suggestions for each chapter.
Reviewer3 wrote: - The title of the manuscript has no clear relations with the text. It is neither explained in the abstract, nor in the main text. The is no clear explanation about the relation of the expression „Company's Sustainability” to „Accounting Conservatism” and „Firms Delisting from KOSDAQ”. The relation between the title and the theory of company sustainability or capital market is neither developed in the text. The relation to sustainability is also important because of the title of the journal.
You are right in pointing out of theoretical background about relation between company sustainability and accounting conservatism being neither developed in the text. To mitigate this concern, we now employ theoretical background (through new prior studies) identifying the relation between sustainability (such as CSR) and conservatism in the abstract, introduction, hypothesis development, and conclusion. Through this process, we avoid the problem of not fully explaining the relation between sustainability and accounting conservatism.
Reviewer3 wrote: - Besides the authors should extend references in order to mention articles from “Sustainability” that are related to earnings management (see Towards Economic Corporate Sustainability in Reporting: What Does Earnings Management around Equity Offerings Mean for Long-Term Performance? by Joanna Lizińska and Leszek Czapiewski; Earnings Management and CSR Disclosure. Family vs. Non-Family Firms by Giovanna Gavana, Pietro Gottardo and Anna Maria Moisello).
We include these papers in the literature review. Around this line, we also include Ferrero et al. (Corporate Social Responsibility and Environmental, 2015) in the literature review.
Reviewer3 wrote: - The references are quite old (the newest from 2003) and quite short. The authors should work also on that.
In the revision, we include recent studies (2013~2018).
Reviewer3 wrote: - The structure of the manuscript should be improved as the abstract is too long. The authors should also make it more informative.
Based on your constructive comment, we summarized the size of the abstract and only the core content.
Reviewer3 wrote: - There are some errors in the text of the manuscript. For example: line 121 – it should be “ … benefits of being listed, …” instead of “… benefits of being unlisted, …” Authors need seriously proofread the paper as English editing is rather poor.
Thank you for this suggestion. In the revision, we corrected to all these typos.
Reviewer4 wrote: - It hard to find the place of the sustainability items in the paper. Even the title of the article is difficult to accept because of the word "sustainability" doesn't cover the content.
You are right in pointing out of theoretical background about relation between company sustainability and accounting conservatism being neither developed in the text. To mitigate this concern, we now employ theoretical background (through new prior studies) identifying the relation between CSR and conservatism in the abstract, introduction, hypothesis development, and conclusion. Through this process, we avoid the problem of not fully explaining the relation between sustainability and accounting conservatism.
Reviewer4 wrote: - The paper analyse the delisting companies and it seems that the delisting is presented as a punishment for the companies reporting bad financial performances. Is it possible that, in Korea, a company choose to delist voluntary, in other circumstances that the financial distress? I think that the author should introduce some explanation about this possibility.
Thank you for bringing this issue to our attention. As you mentioned, delisting requirements explained in this study actually exist in Korea. That is, if a company goes beyond a certain level of financial distress, such as debt ratio or interest coverage ratio, it will not be able to keep the listing. Of course, there are some cases in Korea that even if they cease listing themselves. As your opinion, we concluded that it is necessary to inform that there may be voluntary delisting in Korea. We refer to footnote 2 on p.3.
Reviewer4 wrote: - The conclusion of the authors (lines 99, 100, 101) that by the conservative behavior of the manager, the companies try only to avoid the litigation risk must better be supported by the some literature: the conservatism could have others determinants.
Thank you very much for your suggestion. In the revision, we cited previous studies. These papers show the relation between litigation risk and the conservative behavior of the manager.
Reviewer4 wrote: - The authors seem to be fans of the financial market, proposing that listing of a company bring a lot of benefits and delisting is a catastrophe. I think that the authors should be more neutral in presenting the consequences of the listing/delisting of a company. After all, a very small part of the entities in a country are listed and a lot of others are doing very well not being listed and not intending to do it.
We agree your opinion. Of course, there are more companies in Korea that are not listed. The reason we studied the delisting of the capital market is because the stakeholders of the delisted companies have a lot of damage in Korea. This implies that the listing requirements of Korea are easily achieved in some way. Therefore, we wanted to inform the characteristics of the delisting companies and auditors who audit them.
Reviewer4 wrote: - To verify the word "unlisted" on the line 121: I think that it is an error and the good word is "listed".
Thank you for this suggestion. In the revision, we corrected to all these typos.
Reviewer4 wrote: - Lines 152-153: are you sure that changing the auditor (from a big 4 to a non-big 4) is only justified by the interest of the company to lower the risk of the detection of accounting fraud? Are there so much frauds detected by the market authorities in the case of the delisting companies?
The size of the auditor can be a proxy for audit quality (DeAngelo 1981). Also, this study was based on a previous study (Park 2011), but we thought that it was necessary to tone down as the reviewer's opinion. So we modified the sentence.
Reviewer4 wrote: - The figure 1 includes the variable "sustainability" and I think that the place of this variable is not in this figure.
Based on your comment, we delete the variable "sustainability”.
Reviewer4 wrote: - Lines 219-220: the authors claim that in the case of detecting major accounting fraud, there is an investigation. It is important that the authors tell us who should identify these frauds.
As you mentioned, we present the case of detecting major accounting fraud. Please refer to footnote 3 on p.5.
Reviewer4 wrote: - In formula 1 and 2, there is no explanation about how calculate TACC.
Based on your comment, we explain TACC variable. Please refer to footnote 5 on p.7.
Reviewer 2 Report
This paper has the potential to contribute to the existing literature. However, it will require a number changes in order to attain publication quality:
1. Structure - please the structure of your paper can be improved. Please re-structure as follows: (i) Introduction; (ii) Background; (iii) Theoretical literature review; (iv) Empirical literature review and hypotheses development; (v) Research design; (vi) Empirical results and discussion; and (vii) Summary and conclusion. Please refer to the papers below for guidance on how to better structure your paper.
2. Background - please outline clearly background issues relating to the Korean context. Highlight specific features in Korea that renders it interesting to situate your study on.
3. Theoretical literature review - please identify and engage in explicit discussions of your theoretical framework in a separate section.
4. Empirical literature review and hypotheses development: please re-structure the development of your hypotheses. For each hypotheses, please first outline the theoretical link. Second, outline the prior empirical findings. Third, present any contextual insights and finally, set up your hypotheses. Please refer to the papers below for guidance on this.
5. Empirical results - please present them as follows. For each hypotheses, state what the findings are. Second, indicate whether the relevant hypothesis is supported or not. Third, compare and contrast the findings with those of prior theoretical and empirical studies. Fourth, highlight any implications of your study.
6. Summary and Conclusion - please rewrite that by expanding discussions relating theoretical and practical implications of your study.
Collins G Ntim & Teerooven Soobaroyen, 2013. "Black Economic Empowerment Disclosures by South African Listed Corporations: The Influence of Ownership and Board Characteristics," Journal of Business Ethics, Springer, vol. 116(1), pages 121-138.
Collins G. Ntim, Teerooven Soobaroyen & Martin J. Broad. 2017. " Governance structures, voluntary disclosures and public accountability The case of UK higher education institutions," Accounting, Auditing & Accountability Journal, Vol. 30(1), pages 65-118.
Author Response
Authors’ Response to Reviewers’ Comments
We thank editor and all reviewers for insightful comments on our manuscript. They were invaluable in stimulating new thinking and affording perspective on this paper. Resolving issues you raised permitted us to make what we believe are substantial improvements in the coherence and persuasiveness of the manuscript. In the revised manuscript, all the sentences rewritten are in red letters to help your understanding of what are changed. Below, we reproduce selections from your comments (in Italics), and provide our responses (in blue letters).
Reviewer2 wrote: - Please the structure of your paper can be improved. Please re-structure as follows: (i) Introduction; (ii) Background; (iii) Theoretical literature review; (iv) Empirical literature review and hypotheses development; (v) Research design; (vi) Empirical results and discussion; and (vii) Summary and conclusion. Please refer to the papers below for guidance on how to better structure your paper. Background - please outline clearly background issues relating to the Korean context. Highlight specific features in Korea that renders it interesting to situate your study on. Theoretical literature review - please identify and engage in explicit discussions of your theoretical framework in a separate section. Empirical literature review and hypotheses development: please re-structure the development of your hypotheses. For each hypotheses, please first outline the theoretical link. Second, outline the prior empirical findings. Third, present any contextual insights and finally, set up your hypotheses. Please refer to the papers below for guidance on this. Empirical results - please present them as follows. For each hypotheses, state what the findings are. Second, indicate whether the relevant hypothesis is supported or not. Third, compare and contrast the findings with those of prior theoretical and empirical studies. Fourth, highlight any implications of your study. Summary and Conclusion - please rewrite that by expanding discussions relating theoretical and practical implications of your study.
Thank you for your suggestion. In the revision, we re-structured our paper as your suggestion. Also, we tried to faithfully reflect your suggestions for each chapter.
Reviewer1 wrote: The authors should include the firm characteristics known as determinants of accounting conservatism (e.g., firm size, leverage, market to book ratio, etc.) in the Ball and Shivakumar’s or Basu’s piecewise linear models. The authors should show if the results are qualitatively similar even after control variables are included in the models.
Thank you for bringing this issue to our attention. As you suggested, in the revision (in table 8 and 9), we control for these variables (such as leverage, and Altman Z) in the regressions, and the result does not change. We argue whether firm size and PPE are two different concepts in the sense that firm size is a total construct and PPE is a tangible asset-based construct. However, we cannot add firm size variable because we think that there is a correlation problem between size and PPE.
Reviewer1 wrote: -In Table 5, 7, and 9, the authors do not report all lower-level interactions in the regressions. For example, the authors estimate the model (1) and (2) to test hypothesis 1. Because the four-way interaction terms (DELISTit×BIG4it×CFOit×DCFOit ) are the key variables of interest, the authors should include all lower-level interactions (i.e., DELISTit×BIG4it, BIG4it×CFOit, & BIG4it×DCFOit) to avoid the change in their meaning. Alternatively, the authors may test the hypotheses using the models excluding the four-way interaction terms for two separate samples (i.e., firms audited by Big4 vs. firms audited by non-big4) and statistically compare the results.
Based on your comment, we control for these variables in the regressions, and the result does not change. Please refer to footnote 6 on p.11 for more discussions.
Reviewer3 wrote: - The title of the manuscript has no clear relations with the text. It is neither explained in the abstract, nor in the main text. The is no clear explanation about the relation of the expression „Company's Sustainability” to „Accounting Conservatism” and „Firms Delisting from KOSDAQ”. The relation between the title and the theory of company sustainability or capital market is neither developed in the text. The relation to sustainability is also important because of the title of the journal.
You are right in pointing out of theoretical background about relation between company sustainability and accounting conservatism being neither developed in the text. To mitigate this concern, we now employ theoretical background (through new prior studies) identifying the relation between sustainability (such as CSR) and conservatism in the abstract, introduction, hypothesis development, and conclusion. Through this process, we avoid the problem of not fully explaining the relation between sustainability and accounting conservatism.
Reviewer3 wrote: - Besides the authors should extend references in order to mention articles from “Sustainability” that are related to earnings management (see Towards Economic Corporate Sustainability in Reporting: What Does Earnings Management around Equity Offerings Mean for Long-Term Performance? by Joanna Lizińska and Leszek Czapiewski; Earnings Management and CSR Disclosure. Family vs. Non-Family Firms by Giovanna Gavana, Pietro Gottardo and Anna Maria Moisello).
We include these papers in the literature review. Around this line, we also include Ferrero et al. (Corporate Social Responsibility and Environmental, 2015) in the literature review.
Reviewer3 wrote: - The references are quite old (the newest from 2003) and quite short. The authors should work also on that.
In the revision, we include recent studies (2013~2018).
Reviewer3 wrote: - The structure of the manuscript should be improved as the abstract is too long. The authors should also make it more informative.
Based on your constructive comment, we summarized the size of the abstract and only the core content.
Reviewer3 wrote: - There are some errors in the text of the manuscript. For example: line 121 – it should be “ … benefits of being listed, …” instead of “… benefits of being unlisted, …” Authors need seriously proofread the paper as English editing is rather poor.
Thank you for this suggestion. In the revision, we corrected to all these typos.
Reviewer4 wrote: - It hard to find the place of the sustainability items in the paper. Even the title of the article is difficult to accept because of the word "sustainability" doesn't cover the content.
You are right in pointing out of theoretical background about relation between company sustainability and accounting conservatism being neither developed in the text. To mitigate this concern, we now employ theoretical background (through new prior studies) identifying the relation between CSR and conservatism in the abstract, introduction, hypothesis development, and conclusion. Through this process, we avoid the problem of not fully explaining the relation between sustainability and accounting conservatism.
Reviewer4 wrote: - The paper analyse the delisting companies and it seems that the delisting is presented as a punishment for the companies reporting bad financial performances. Is it possible that, in Korea, a company choose to delist voluntary, in other circumstances that the financial distress? I think that the author should introduce some explanation about this possibility.
Thank you for bringing this issue to our attention. As you mentioned, delisting requirements explained in this study actually exist in Korea. That is, if a company goes beyond a certain level of financial distress, such as debt ratio or interest coverage ratio, it will not be able to keep the listing. Of course, there are some cases in Korea that even if they cease listing themselves. As your opinion, we concluded that it is necessary to inform that there may be voluntary delisting in Korea. We refer to footnote 2 on p.3.
Reviewer4 wrote: - The conclusion of the authors (lines 99, 100, 101) that by the conservative behavior of the manager, the companies try only to avoid the litigation risk must better be supported by the some literature: the conservatism could have others determinants.
Thank you very much for your suggestion. In the revision, we cited previous studies. These papers show the relation between litigation risk and the conservative behavior of the manager.
Reviewer4 wrote: - The authors seem to be fans of the financial market, proposing that listing of a company bring a lot of benefits and delisting is a catastrophe. I think that the authors should be more neutral in presenting the consequences of the listing/delisting of a company. After all, a very small part of the entities in a country are listed and a lot of others are doing very well not being listed and not intending to do it.
We agree your opinion. Of course, there are more companies in Korea that are not listed. The reason we studied the delisting of the capital market is because the stakeholders of the delisted companies have a lot of damage in Korea. This implies that the listing requirements of Korea are easily achieved in some way. Therefore, we wanted to inform the characteristics of the delisting companies and auditors who audit them.
Reviewer4 wrote: - To verify the word "unlisted" on the line 121: I think that it is an error and the good word is "listed".
Thank you for this suggestion. In the revision, we corrected to all these typos.
Reviewer4 wrote: - Lines 152-153: are you sure that changing the auditor (from a big 4 to a non-big 4) is only justified by the interest of the company to lower the risk of the detection of accounting fraud? Are there so much frauds detected by the market authorities in the case of the delisting companies?
The size of the auditor can be a proxy for audit quality (DeAngelo 1981). Also, this study was based on a previous study (Park 2011), but we thought that it was necessary to tone down as the reviewer's opinion. So we modified the sentence.
Reviewer4 wrote: - The figure 1 includes the variable "sustainability" and I think that the place of this variable is not in this figure.
Based on your comment, we delete the variable "sustainability”.
Reviewer4 wrote: - Lines 219-220: the authors claim that in the case of detecting major accounting fraud, there is an investigation. It is important that the authors tell us who should identify these frauds.
As you mentioned, we present the case of detecting major accounting fraud. Please refer to footnote 3 on p.5.
Reviewer4 wrote: - In formula 1 and 2, there is no explanation about how calculate TACC.
Based on your comment, we explain TACC variable. Please refer to footnote 5 on p.7.
Reviewer 3 Report
Referee Report
Company's Sustainability and Accounting Conservatism: Firms Delisting from KOSDAQ
This study investigates characteristics and accounting conservatism of delisted companies from KOSDAQ.
Authors collect samples of delisted companies from 2009 to 2016, and use Ball and Shivakumar conservatism models as main proxies of accounting conservatism (additionally Basu model, Givoly and Hayn model to confirm the robustness).
Their results are as follows: first, they find that companies before the delisting are more conservative than other companies on KOSDAQ; second, companies whose auditor is non-big4 are significantly more conservative before the delisting.
The hypotheses are well developed. The hypotheses are verified properly.
The title of the manuscript has no clear relations with the text. It is neither explained in the abstract, nor in the main text. The is no clear explanation about the relation of the expression „Company's Sustainability” to „Accounting Conservatism” and „Firms Delisting from KOSDAQ”. The relation between the title and the theory of company sustainability or capital market is neither developed in the text. The relation to sustainability is also important because of the title of the journal.
Besides the authors should extend references in order to mention articles from “Sustainability” that are related to earnings management (see Towards Economic Corporate Sustainability in Reporting: What Does Earnings Management around Equity Offerings Mean for Long-Term Performance? by Joanna Lizińska and Leszek Czapiewski; Earnings Management and CSR Disclosure. Family vs. Non-Family Firms by Giovanna Gavana, Pietro Gottardo and Anna Maria Moisello).
The references are quite old (the newest from 2003) and quite short. The authors should work also on that.
The structure of the manuscript should be improved as the abstract is too long. The authors should also make it more informative.
There are some errors in the text of the manuscript. For example: line 121 – it should be “ … benefits of being listed, …” instead of “… benefits of being unlisted, …”
Authors need seriously proofread the paper as English editing is rather poor.
Last, I would like to thank the authors for an interesting and potentially important paper. I hope that comments and suggestions will help to improve the manuscript. Good luck!
Author Response
Authors’ Response to Reviewers’ Comments
We thank editor and all reviewers for insightful comments on our manuscript. They were invaluable in stimulating new thinking and affording perspective on this paper. Resolving issues you raised permitted us to make what we believe are substantial improvements in the coherence and persuasiveness of the manuscript. In the revised manuscript, all the sentences rewritten are in red letters to help your understanding of what are changed. Below, we reproduce selections from your comments (in Italics), and provide our responses (in blue letters).
Reviewer3 wrote: - The title of the manuscript has no clear relations with the text. It is neither explained in the abstract, nor in the main text. The is no clear explanation about the relation of the expression „Company's Sustainability” to „Accounting Conservatism” and „Firms Delisting from KOSDAQ”. The relation between the title and the theory of company sustainability or capital market is neither developed in the text. The relation to sustainability is also important because of the title of the journal.
You are right in pointing out of theoretical background about relation between company sustainability and accounting conservatism being neither developed in the text. To mitigate this concern, we now employ theoretical background (through new prior studies) identifying the relation between sustainability (such as CSR) and conservatism in the abstract, introduction, hypothesis development, and conclusion. Through this process, we avoid the problem of not fully explaining the relation between sustainability and accounting conservatism.
Reviewer3 wrote: - Besides the authors should extend references in order to mention articles from “Sustainability” that are related to earnings management (see Towards Economic Corporate Sustainability in Reporting: What Does Earnings Management around Equity Offerings Mean for Long-Term Performance? by Joanna Lizińska and Leszek Czapiewski; Earnings Management and CSR Disclosure. Family vs. Non-Family Firms by Giovanna Gavana, Pietro Gottardo and Anna Maria Moisello).
We include these papers in the literature review. Around this line, we also include Ferrero et al. (Corporate Social Responsibility and Environmental, 2015) in the literature review.
Reviewer3 wrote: - The references are quite old (the newest from 2003) and quite short. The authors should work also on that.
In the revision, we include recent studies (2013~2018).
Reviewer3 wrote: - The structure of the manuscript should be improved as the abstract is too long. The authors should also make it more informative.
Based on your constructive comment, we summarized the size of the abstract and only the core content.
Reviewer3 wrote: - There are some errors in the text of the manuscript. For example: line 121 – it should be “ … benefits of being listed, …” instead of “… benefits of being unlisted, …” Authors need seriously proofread the paper as English editing is rather poor.
Thank you for this suggestion. In the revision, we corrected to all these typos.
Reviewer1 wrote: The authors should include the firm characteristics known as determinants of accounting conservatism (e.g., firm size, leverage, market to book ratio, etc.) in the Ball and Shivakumar’s or Basu’s piecewise linear models. The authors should show if the results are qualitatively similar even after control variables are included in the models.
Thank you for bringing this issue to our attention. As you suggested, in the revision (in table 8 and 9), we control for these variables (such as leverage, and Altman Z) in the regressions, and the result does not change. We argue whether firm size and PPE are two different concepts in the sense that firm size is a total construct and PPE is a tangible asset-based construct. However, we cannot add firm size variable because we think that there is a correlation problem between size and PPE.
Reviewer1 wrote: -In Table 5, 7, and 9, the authors do not report all lower-level interactions in the regressions. For example, the authors estimate the model (1) and (2) to test hypothesis 1. Because the four-way interaction terms (DELISTit×BIG4it×CFOit×DCFOit ) are the key variables of interest, the authors should include all lower-level interactions (i.e., DELISTit×BIG4it, BIG4it×CFOit, & BIG4it×DCFOit) to avoid the change in their meaning. Alternatively, the authors may test the hypotheses using the models excluding the four-way interaction terms for two separate samples (i.e., firms audited by Big4 vs. firms audited by non-big4) and statistically compare the results.
Based on your comment, we control for these variables in the regressions, and the result does not change. Please refer to footnote 6 on p.11 for more discussions.
Reviewer2 wrote: - Please the structure of your paper can be improved. Please re-structure as follows: (i) Introduction; (ii) Background; (iii) Theoretical literature review; (iv) Empirical literature review and hypotheses development; (v) Research design; (vi) Empirical results and discussion; and (vii) Summary and conclusion. Please refer to the papers below for guidance on how to better structure your paper. Background - please outline clearly background issues relating to the Korean context. Highlight specific features in Korea that renders it interesting to situate your study on. Theoretical literature review - please identify and engage in explicit discussions of your theoretical framework in a separate section. Empirical literature review and hypotheses development: please re-structure the development of your hypotheses. For each hypotheses, please first outline the theoretical link. Second, outline the prior empirical findings. Third, present any contextual insights and finally, set up your hypotheses. Please refer to the papers below for guidance on this. Empirical results - please present them as follows. For each hypotheses, state what the findings are. Second, indicate whether the relevant hypothesis is supported or not. Third, compare and contrast the findings with those of prior theoretical and empirical studies. Fourth, highlight any implications of your study. Summary and Conclusion - please rewrite that by expanding discussions relating theoretical and practical implications of your study.
Thank you for your suggestion. In the revision, we re-structured our paper as your suggestion. Also, we tried to faithfully reflect your suggestions for each chapter.
Reviewer4 wrote: - It hard to find the place of the sustainability items in the paper. Even the title of the article is difficult to accept because of the word "sustainability" doesn't cover the content.
You are right in pointing out of theoretical background about relation between company sustainability and accounting conservatism being neither developed in the text. To mitigate this concern, we now employ theoretical background (through new prior studies) identifying the relation between CSR and conservatism in the abstract, introduction, hypothesis development, and conclusion. Through this process, we avoid the problem of not fully explaining the relation between sustainability and accounting conservatism.
Reviewer4 wrote: - The paper analyse the delisting companies and it seems that the delisting is presented as a punishment for the companies reporting bad financial performances. Is it possible that, in Korea, a company choose to delist voluntary, in other circumstances that the financial distress? I think that the author should introduce some explanation about this possibility.
Thank you for bringing this issue to our attention. As you mentioned, delisting requirements explained in this study actually exist in Korea. That is, if a company goes beyond a certain level of financial distress, such as debt ratio or interest coverage ratio, it will not be able to keep the listing. Of course, there are some cases in Korea that even if they cease listing themselves. As your opinion, we concluded that it is necessary to inform that there may be voluntary delisting in Korea. We refer to footnote 2 on p.3.
Reviewer4 wrote: - The conclusion of the authors (lines 99, 100, 101) that by the conservative behavior of the manager, the companies try only to avoid the litigation risk must better be supported by the some literature: the conservatism could have others determinants.
Thank you very much for your suggestion. In the revision, we cited previous studies. These papers show the relation between litigation risk and the conservative behavior of the manager.
Reviewer4 wrote: - The authors seem to be fans of the financial market, proposing that listing of a company bring a lot of benefits and delisting is a catastrophe. I think that the authors should be more neutral in presenting the consequences of the listing/delisting of a company. After all, a very small part of the entities in a country are listed and a lot of others are doing very well not being listed and not intending to do it.
We agree your opinion. Of course, there are more companies in Korea that are not listed. The reason we studied the delisting of the capital market is because the stakeholders of the delisted companies have a lot of damage in Korea. This implies that the listing requirements of Korea are easily achieved in some way. Therefore, we wanted to inform the characteristics of the delisting companies and auditors who audit them.
Reviewer4 wrote: - To verify the word "unlisted" on the line 121: I think that it is an error and the good word is "listed".
Thank you for this suggestion. In the revision, we corrected to all these typos.
Reviewer4 wrote: - Lines 152-153: are you sure that changing the auditor (from a big 4 to a non-big 4) is only justified by the interest of the company to lower the risk of the detection of accounting fraud? Are there so much frauds detected by the market authorities in the case of the delisting companies?
The size of the auditor can be a proxy for audit quality (DeAngelo 1981). Also, this study was based on a previous study (Park 2011), but we thought that it was necessary to tone down as the reviewer's opinion. So we modified the sentence.
Reviewer4 wrote: - The figure 1 includes the variable "sustainability" and I think that the place of this variable is not in this figure.
Based on your comment, we delete the variable "sustainability”.
Reviewer4 wrote: - Lines 219-220: the authors claim that in the case of detecting major accounting fraud, there is an investigation. It is important that the authors tell us who should identify these frauds.
As you mentioned, we present the case of detecting major accounting fraud. Please refer to footnote 3 on p.5.
Reviewer4 wrote: - In formula 1 and 2, there is no explanation about how calculate TACC.
Based on your comment, we explain TACC variable. Please refer to footnote 5 on p.7.
Reviewer 4 Report
It hard to find the place of the sustainability items in the paper. Even the title of the article is difficult to accept because of the word "sustainability" doesn't cover the content.
If the case that the editors find an accounting, financial market, auditing or a more general business journal, I think that the paper could be accepted with some minor revisions. The following commentaries are made in this respect.
The paper analyse the delisting companies and it seems that the delisting is presented as a punishment for the companies reporting bad financial performances. Is it possible that, in Korea, a company choose to delist voluntary, in other circumstances that the financial distress? I think that the author should introduce some explanation about this possibility.
The conclusion of the authors (lines 99, 100, 101) that by the conservative behavior of the manager, the companies try only to avoid the litigation risk must better be supported by the some literature: the conservatism could have others determinants.
The authors seem to be fans of the financial market, proposing that listing of a company bring a lot of benefits and delisting is a catastrophe. I think that the authors should be more neutral in presenting the consequences of the listing/delisting of a company. After all, a very small part of the entities in a country are listed and a lot of others are doing very well not being listed and not intending to do it.
To verify the word "unlisted" on the line 121: I think that it is an error and the good word is "listed".
Lines 152-153: are you sure that changing the auditor (from a big 4 to a non-big 4) is only justified by the interest of the company to lower the risk of the detection of accounting fraud? Are there so much frauds detected by the market authorities in the case of the delisting companies?
The figure 1 includes the variable "sustainability" and I think that the place of this variable is not in this figure.
Lines 219-220: the authors claim that in the case of detecting major accounting fraud, there is an investigation. It is important that the authors tell us who should identify these frauds.
In formula 1 and 2, there is no explanation about how calculate TACC.
The econometric models seem to be correct.
Author Response
Authors’ Response to Reviewers’ Comments
We thank editor and all reviewers for insightful comments on our manuscript. They were invaluable in stimulating new thinking and affording perspective on this paper. Resolving issues you raised permitted us to make what we believe are substantial improvements in the coherence and persuasiveness of the manuscript. In the revised manuscript, all the sentences rewritten are in red letters to help your understanding of what are changed. Below, we reproduce selections from your comments (in Italics), and provide our responses (in blue letters).
Reviewer4 wrote: - It hard to find the place of the sustainability items in the paper. Even the title of the article is difficult to accept because of the word "sustainability" doesn't cover the content.
You are right in pointing out of theoretical background about relation between company sustainability and accounting conservatism being neither developed in the text. To mitigate this concern, we now employ theoretical background (through new prior studies) identifying the relation between CSR and conservatism in the abstract, introduction, hypothesis development, and conclusion. Through this process, we avoid the problem of not fully explaining the relation between sustainability and accounting conservatism.
Reviewer4 wrote: - The paper analyse the delisting companies and it seems that the delisting is presented as a punishment for the companies reporting bad financial performances. Is it possible that, in Korea, a company choose to delist voluntary, in other circumstances that the financial distress? I think that the author should introduce some explanation about this possibility.
Thank you for bringing this issue to our attention. As you mentioned, delisting requirements explained in this study actually exist in Korea. That is, if a company goes beyond a certain level of financial distress, such as debt ratio or interest coverage ratio, it will not be able to keep the listing. Of course, there are some cases in Korea that even if they cease listing themselves. As your opinion, we concluded that it is necessary to inform that there may be voluntary delisting in Korea. We refer to footnote 2 on p.3.
Reviewer4 wrote: - The conclusion of the authors (lines 99, 100, 101) that by the conservative behavior of the manager, the companies try only to avoid the litigation risk must better be supported by the some literature: the conservatism could have others determinants.
Thank you very much for your suggestion. In the revision, we cited previous studies. These papers show the relation between litigation risk and the conservative behavior of the manager.
Reviewer4 wrote: - The authors seem to be fans of the financial market, proposing that listing of a company bring a lot of benefits and delisting is a catastrophe. I think that the authors should be more neutral in presenting the consequences of the listing/delisting of a company. After all, a very small part of the entities in a country are listed and a lot of others are doing very well not being listed and not intending to do it.
We agree your opinion. Of course, there are more companies in Korea that are not listed. The reason we studied the delisting of the capital market is because the stakeholders of the delisted companies have a lot of damage in Korea. This implies that the listing requirements of Korea are easily achieved in some way. Therefore, we wanted to inform the characteristics of the delisting companies and auditors who audit them.
Reviewer4 wrote: - To verify the word "unlisted" on the line 121: I think that it is an error and the good word is "listed".
Thank you for this suggestion. In the revision, we corrected to all these typos.
Reviewer4 wrote: - Lines 152-153: are you sure that changing the auditor (from a big 4 to a non-big 4) is only justified by the interest of the company to lower the risk of the detection of accounting fraud? Are there so much frauds detected by the market authorities in the case of the delisting companies?
The size of the auditor can be a proxy for audit quality (DeAngelo 1981). Also, this study was based on a previous study (Park 2011), but we thought that it was necessary to tone down as the reviewer's opinion. So we modified the sentence.
Reviewer4 wrote: - The figure 1 includes the variable "sustainability" and I think that the place of this variable is not in this figure.
Based on your comment, we delete the variable "sustainability”.
Reviewer4 wrote: - Lines 219-220: the authors claim that in the case of detecting major accounting fraud, there is an investigation. It is important that the authors tell us who should identify these frauds.
As you mentioned, we present the case of detecting major accounting fraud. Please refer to footnote 3 on p.5.
Reviewer4 wrote: - In formula 1 and 2, there is no explanation about how calculate TACC.
Based on your comment, we explain TACC variable. Please refer to footnote 5 on p.7.
Reviewer1 wrote: The authors should include the firm characteristics known as determinants of accounting conservatism (e.g., firm size, leverage, market to book ratio, etc.) in the Ball and Shivakumar’s or Basu’s piecewise linear models. The authors should show if the results are qualitatively similar even after control variables are included in the models.
Thank you for bringing this issue to our attention. As you suggested, in the revision (in table 8 and 9), we control for these variables (such as leverage, and Altman Z) in the regressions, and the result does not change. We argue whether firm size and PPE are two different concepts in the sense that firm size is a total construct and PPE is a tangible asset-based construct. However, we cannot add firm size variable because we think that there is a correlation problem between size and PPE.
Reviewer1 wrote: -In Table 5, 7, and 9, the authors do not report all lower-level interactions in the regressions. For example, the authors estimate the model (1) and (2) to test hypothesis 1. Because the four-way interaction terms (DELISTit×BIG4it×CFOit×DCFOit ) are the key variables of interest, the authors should include all lower-level interactions (i.e., DELISTit×BIG4it, BIG4it×CFOit, & BIG4it×DCFOit) to avoid the change in their meaning. Alternatively, the authors may test the hypotheses using the models excluding the four-way interaction terms for two separate samples (i.e., firms audited by Big4 vs. firms audited by non-big4) and statistically compare the results.
Based on your comment, we control for these variables in the regressions, and the result does not change. Please refer to footnote 6 on p.11 for more discussions.
Reviewer2 wrote: - Please the structure of your paper can be improved. Please re-structure as follows: (i) Introduction; (ii) Background; (iii) Theoretical literature review; (iv) Empirical literature review and hypotheses development; (v) Research design; (vi) Empirical results and discussion; and (vii) Summary and conclusion. Please refer to the papers below for guidance on how to better structure your paper. Background - please outline clearly background issues relating to the Korean context. Highlight specific features in Korea that renders it interesting to situate your study on. Theoretical literature review - please identify and engage in explicit discussions of your theoretical framework in a separate section. Empirical literature review and hypotheses development: please re-structure the development of your hypotheses. For each hypotheses, please first outline the theoretical link. Second, outline the prior empirical findings. Third, present any contextual insights and finally, set up your hypotheses. Please refer to the papers below for guidance on this. Empirical results - please present them as follows. For each hypotheses, state what the findings are. Second, indicate whether the relevant hypothesis is supported or not. Third, compare and contrast the findings with those of prior theoretical and empirical studies. Fourth, highlight any implications of your study. Summary and Conclusion - please rewrite that by expanding discussions relating theoretical and practical implications of your study.
Thank you for your suggestion. In the revision, we re-structured our paper as your suggestion. Also, we tried to faithfully reflect your suggestions for each chapter.
Reviewer3 wrote: - The title of the manuscript has no clear relations with the text. It is neither explained in the abstract, nor in the main text. The is no clear explanation about the relation of the expression „Company's Sustainability” to „Accounting Conservatism” and „Firms Delisting from KOSDAQ”. The relation between the title and the theory of company sustainability or capital market is neither developed in the text. The relation to sustainability is also important because of the title of the journal.
You are right in pointing out of theoretical background about relation between company sustainability and accounting conservatism being neither developed in the text. To mitigate this concern, we now employ theoretical background (through new prior studies) identifying the relation between sustainability (such as CSR) and conservatism in the abstract, introduction, hypothesis development, and conclusion. Through this process, we avoid the problem of not fully explaining the relation between sustainability and accounting conservatism.
Reviewer3 wrote: - Besides the authors should extend references in order to mention articles from “Sustainability” that are related to earnings management (see Towards Economic Corporate Sustainability in Reporting: What Does Earnings Management around Equity Offerings Mean for Long-Term Performance? by Joanna Lizińska and Leszek Czapiewski; Earnings Management and CSR Disclosure. Family vs. Non-Family Firms by Giovanna Gavana, Pietro Gottardo and Anna Maria Moisello).
We include these papers in the literature review. Around this line, we also include Ferrero et al. (Corporate Social Responsibility and Environmental, 2015) in the literature review.
Reviewer3 wrote: - The references are quite old (the newest from 2003) and quite short. The authors should work also on that.
In the revision, we include recent studies (2013~2018).
Reviewer3 wrote: - The structure of the manuscript should be improved as the abstract is too long. The authors should also make it more informative.
Based on your constructive comment, we summarized the size of the abstract and only the core content.
Reviewer3 wrote: - There are some errors in the text of the manuscript. For example: line 121 – it should be “ … benefits of being listed, …” instead of “… benefits of being unlisted, …” Authors need seriously proofread the paper as English editing is rather poor.
Thank you for this suggestion. In the revision, we corrected to all these typos.
Round 2
Reviewer 2 Report
The authors have addressed my concerns adequately.
