Structural Changes in the Contemporaneous Linear Relation between Returns and Earnings after 1997 Financial Crisis in Korea

Abstract

We study the effect of accounting reforms on the quality of accounting information after the 1997 financial crisis in Korea. Using observations of accounting earnings and stock returns over the past 20 years for the companies listed on the Korea Stock Exchange, we find that the contemporaneous linear relation between stock returns and accounting earnings has changed after the accounting reforms in the late 1990s. The association between annual earnings and returns has strengthened since the 1997 crisis. We also find that the changes in the association between annual earnings and returns are partly explained by the changes in asymmetry and lags effect. Annual earnings reflect good and bad news in a more asymmetric fashion and have a stronger association with lagged price changes surrounding the financial crisis.