Prohibition of Unfair Profit Offering and Asymmetric Cost Behavior

Abstract

Affiliates of large corporate groups could be penalized for breaking the regulation against of favoring internal transaction. This study examines the effects on prohibition of unfair profit offering on Monoploy Regulation and Fair Trade Act(MRFTA) on the asymmetric cost behavior. Samples are selected among listed companies in Korea from 2013 to 2021 and number of samples is 2,180 firms per year which consist and 19,620 observations for 9 years. The results are as follows. First, listed companies in Korea show downward stickiness of costs for the purpose of adjustment costs when sales are decreased. Second, affiliates of conglomerates show downward elasticity through earnings management to conform to the regulation. Third, higher of asset intensity and employ intensity show stronger downward stickiness for the purpose of adjustment costs. This study will be practically meaningful because it analyses the influences of prohibition against unfair profit offering within the affiliates n Korea for the first time. In addition, it provides empirical evidence the relation between the regulation and asymmetric cost behavior and emphasis the necessity on the surveillance of authority.