1. Timeliness and Informativeness of Fair Disclosure: Evidence from Korean Preliminary Financial Reports by Inman Song Yonhee Park Dong-Hoon Yang Mahmud Hossain 2008. 8

2. Regulation of Fair Disclosure (Korean and US SECs) Backgrounds of the Study(I) To prohibit selective disclosure of material nonpublic information by listed firms To level the playing field for all investors by mandating more timely disclosures that serves to preempt insidersinformation advantage

3. Current Korean Regulations for Disclosures System Backgrounds of the Study(II) Securities Exchange Act Article 191-10, 3 Regulations on listed company Article 4-2 Preliminary Financial Reports (PFR) Sales revenue, operating income or net income of the recent fiscal year has changed more than 30% Should be disclosed only prior to the public notice date (of shareholders meeting)

4. Closing date Submission date (of financial statements to auditors) Date of shareholders meeting Audit report date (at which the firm receives audit reports) Public notice date (of share- holdersmeeting) Filing date (of audit report to shareholders) Possible period of releasing PFRs Backgrounds of the Study(III)

5. Problems with Current FD Regulations Backgrounds of the Study(IV) PFR can be disclosed before public notice date that is followed by audit report date As a result, firms may release PFRs even after audit report date without violating the regulation May preempt the informativeness of PFR and invalidate the effectiveness of the regulation

6. Research Questions (Timeliness of FD) Do Korean firms comply with the FD regulation requiring prompt notification of information about material changes in their financial performance? (Informativeness of FD) Are there differential market reactions to different timings of PFR disclosures?

7. Grant (1980) Related Literature(I) Finds that annual earnings announcements of OTC firms (with less amount of interim information) appear to possess more information content than those of NYSE firms The information of the annual earnings announcement is anticipated by the market prior to the date of release due to the existing interim sources of information (as an alternative form of PFR)

8. Firth (1981) Related Literature(II) Finds that week of the preliminary announcement gives the highest weekly level of information Preliminary reporting pre-empts insider trading by putting in the public domain information which would otherwise be in the public domain

9. Opoong (1995 & 1996) Related Literature(III) Document that significant price response to the release of UK annual preliminary reports occur in hour (or day) in which the report is released Preliminary reports are still value relevant in spite of reliability problems due to these reports not to subject to third party certification

10. Song (1989), Jang and Cheon (2003) Related Literature(IV) Finds that substantial information is conveyed to the stock market by the release of voluntary preliminary annual financial reports In contrast, information released at the annual shareholders meeting, which is subsequent to the release of preliminary annual financial reports, does not appear to give significant information to investors

11. Difference with Prior with Literature Related Literature(V) With respect to addressing potential preemption of actual earnings information of preliminary announcements, prior studies employ a firms annual announcement in its different stages: - public notice date (Firth, 1981) - date of shareholders meeting (Grant, 1980; Firth, 1981; Song, 1985; Jang and Cheon, 2005) Failed to identify the earliest announcement date of actual (i.e., certified) earnings to assess the effectiveness of purported disclosure regulation

12. Empirical Model Car t (-1,0,1) = a 1 + a 2 PUE t + a 3 DB PFR *PUE t + a 4 D NEG *PUE t + a 5 SIZE t + a 6~8 YD + e t where, CAR(-1,0,1): cumulative abnormal return from day -1 to day +1 (day 0 day on event day) PUE : unexpected PFR earning, (PFR NI t – actual NI t-1 )/ price t-1 DB PFR : 1 if PFR is disclosed before audit report date, 0 otherwise D NEG : 1 if net income is negative, 0 otherwise SIZE: log(total market price t-1 ) YD: year dummies

13. Sample and Data Description of Sample Selection Procedure Total observations on Korea Information Service-Financial Analysis System (KIS-FAS) data base and Data Analysis, Retrieval and Transfer(DART) system on FSS that satisfy all of the following initial sample criteria: (1)Korean Stock Exchange listing, (2)Fiscal year ending December 31, and (3)Availability of dates of relevant financial reporting events including audit report date, public notice date and filing date of audit report. Less: Observations without the announcements of PFRs Sub Total Less: Observations with missing audit dates or public notice dates Sample used to perform analysis of timeliness of PFR reports Less: Observations with PFR releases later than 2 days of audit report date Final sample for the test of market reactions to PFR announcements 1,852 (547) 1,305 (86) 1,219 (236) 983

14. Results: Timing of Disclosures(I) Disclosure timing compared to PFR date -22 or less (-15) ~(-21) (-8)~ (-14) (-1)~ (-7) 01 ~ 7 8 ~ (14) (15) ~(21) 22 or more Audit report date8086146241 514191144834 Public notice date of shareholders meeting 261111063267268203370 Filing date of audit report to shareholders 1435165196611 Date of annual shareholders meeting 1115225968 PFR Reproting Lag (N= 1,219) 604 (50%) sample firms release PFRs even after the audit report date

15. Results: Timing of Disclosures(II) Over- vs. Under-estimation of PFR earnings Why tendency of late PFR disclosure? More than half of sample firms (628) over- or under-estimate preliminary earnings, which may create unnecessary disclosure-related legal liability YearDiscription No. of firms PFR earnings (A) Audited earnings (B) Difference (A – B) 2001 ~ 2004 Overstated37862,24557,7774,468 Understated25053,41956,488-3,069 No change58566,10800 628 1,219

16. Results: Market Test(I) Market Reaction to Unexpected PFR Earnings around PFR Release Date PFRs convey information to stock market only if they are disclosed prior to audit report date Model Full Sample (n=983) Full Sample with DB*PUE(n=983) Sub-sample with PFR release before Audit Report Date (n=490) Sub-sample with PFR release after Audit Report Date (n=493) Intercept 0.101( 3.36) *** 0.098( 3.33) *** 0.098( 1.46)0.105( 2.00) ** PUE 0.002( 1.73) ** 0.001( 0.70)0.005( 2.07) ** 0.001(0.38) DB PFR *PUE 0.004( 1.66) * D NEG *LOSS -0.044(-8.48) *** -0.044(-8.37) * -0.041(-4.39) *** -0.003(-5.46) *** SIZE -0.003( -2.81) *** -0.003(-2.80) *** -0.003(-1.16) ** -0.047(-1.64) * Adj R 2 6.47%6.61%7.74%6.65%

17. Results: Market Test(II) Market Reaction to Unexpected Actual Earnings around Audit Report Date The informativeness of unexpected actual earnings is warranted only when audit report date proceeds PFR release date Model (n=1,663) Basic ModelModel 1Model 2Model 3 Intercept 0.105( 4.29) *** 0.086( 3.55) *** 0.085( 3.51)0.085( 3.55) *** UE -0.001(-0.74)-0.001( -0.37)-0.002(-1.40)-0.001(-0.06) DB PFR *UE DA PFR *UE DNO PFR *UE ------ 0.002(0.52) - 0.011( 2.84) *** - 0.007(0.57) D NEG *UE -0.013(-3.34) *** -0.001(-0.21)-0.001(-0.37)-0.001(-0.19) SIZE -0.003( -3.64) *** -0.002(-2.97) *** -0.002(-2.93) ** -0.002(-2.97) *** Adj R 2 1.47%0.86%1.30%0.87%

18. Summary and Conclusions Half of sample firms release PFRs after the audit report date. PFRs are not preliminary any more since external auditing processes are substantially completed at audit report date PFRs have information contents only if they are disclosed prior to audit report date. Consistent with the conjecture that timeliness increases the informativeness of PFR disclosure(by curbing insiders ability to potentially profit from their information advantages)

19. Implications for Accounting Policy Makers Current regulation for PFR in Korea may not be effective to fulfill its main objective Necessary to amend current regulation to require that PFRs be released well before independent auditors complete the audit