Do Controlling Shareholders in Korea Attempt to Influence Stock Prices When Making a Stock Gift?

In Korea, there is a general tendency for controlling shareholders to transfer the ownership of their companies to the next generation. In this paper, we investigate whether Korean controlling shareholders attempt to influence stock prices when they transfer stock to related parties as gifts. Because gift taxes are levied based on the average market value of the stock transferred for a certain period known as the valuation period, controlling shareholders may have incentives to depress the stock prices in this period to reduce the gift tax. We specifically conjecture that controlling shareholders may wish to time the disclosure of good news and bad news so that the latter (the former) is released during (outside of) the valuation period for the stock to be transferred. We further hypothesize that controlling shareholders have an incentive to manage earnings for the quarters that are expected to influence stock prices in the valuation period. To test these hypotheses we examine the disclosure timing of good and bad news and the possibility of earnings management for a sample of 118 firm-quarters (83 firms) during which controlling shareholders transferred stocks as gifts. We show that during the valuation period the frequency of good news was considerably lower than in the periods before and after, whereas the frequency of bad news during the valuation period was substantially higher. This result supports the hypothesis that controlling shareholders may delay good news and bring forward bad news in an attempt to influence stock prices during the valuation period. We also discover that the sample firms significantly reduced their discretionary accruals before the valuation period compared with other periods