Stock Repurchase and Earnings Management

Considering that stock price stability or profit adjustment can be strategically performed through treasury stock trading, it was verified how managers’ earnings’ management appears according to the proportion of treasury stock holdings and differences since the enforcement of the revised New External Audit Act since 2018. First, when the ratio of treasury stock holdings is low, positive (＋) profit adjustment is performed, whereas when the ratio of treasury stock holdings is high, negative (－) profit adjustment is performed. In the case of real earnings management, it can be seen that the higher the share of treasury stocks, the more actual profit adjustment is made using operating cash flow and sales management expenses. Second, before the revision of the External Audit Act, it can be seen that the higher the proportion of treasury stock holdings, the more negative (－) earnings adjustment is. However, it can be said that the higher the proportion of treasury stock holdings after the revision of the External Audit Act, the higher the profit through discretionary accruals and actual profit adjustments. Capital market participants should take into account that there is a possibility of earnings adjustment for companies with a high proportion of treasury stocks.