This study examines how Chief Executive Officer (CEO) overconfidence affects profitability. Using United States data from 1992 to 2010, we find that firms with overconfident CEOs have a greater return on net operating assets (RNOA). To identify the sources of this higher performance, RNOA is partitioned into profit margin and asset turnover. This Dupont analysis reveals that higher RNOA of firms with overconfident CEOs comes from profit margin and is not associated with asset turnover. Our results also show that the earnings components of firms having overconfident CEOs better predict future earnings change. The results are robust to the different definitions of CEO overconfidence and profitability. Additional analyses show that CEO overconfidence is positively related with stock performances proxied by abnormal stock returns. Overall, our results suggest that CEO overconfidence is an important factor that contributes to higher and predictable performance of firms.

This study investigated the effect of corporate social performance (CSP) on audit hours and whether the emphasis of matter (EOM) paragraphs in audit report moderates the association between CSP and audit hours. Auditors input audit hours based on the judgement of audit risk related to firm and managerial characteristics. They increase audit hours when they perceive that client companies are riskier; thus, audit hours reflect auditors’ perceptions of the firm. Prior studies have shown that high CSP is associated with ethical managers, leading to fewer audit hours. However, auditors’ perceptions of CSP can be different depending on their knowledge about firms’ potential risks. EOM paragraphs consists of risk-related factors, such as going-concern opinions or litigation and they should be considered when auditors determine that users need to check this information acquired in the auditing process. Therefore, EOM is likely to affect auditors’ perceptions of CSP. This study investigates this possibility by examining whether the associations between CSP and audit hours are different in firms with and without EOM paragraphs in audit reports. Using Korean listed companies from 2011 to 2016, we found that CSP has a negative association with audit hours, suggesting that better CSP is related to ethical corporate social responsibility (CSR) in Korea, consistently with the literature. However, CSP is not related to audit hours for firms with EOM paragraphs, possibly indicating that auditors differently interpret CSP based on their knowledge gained in the auditing process. Our findings contribute to the literature by suggesting that EOM paragraphs can be used in distinguishing firms’ CSR motivations and that information users should be careful in interpreting CSP.

Newly listed firms can actively engage in corporate social responsibility (CSR) to build reputation, but they may postpone CSR until they have enough slack for it. Related to this, prior literature does not provide consistent results, the US evidence supports the latter while the Chinese results support the former. To extend the literature, we use Korean listed companies and examine the association between the listing period and CSR. We further investigate the effect of analyst following on the relationship. The empirical results show that firms with a shorter listing period invest more in CSR and that the association exists only in firm-years followed by analysts, indicating the importance of the information environment to inform CSR. We additionally find that young listed companies mainly use social contribution and soundness, which can be discretionarily conducted from a short-term perspective. The results of this study using CSR to obtain a short-term objective suggest that policymakers need to analyze a firm’s behavior from various perspectives and to establish proper guidelines to achieve a long-term goal of CSR “sustainability”.

This study investigates whether related party transactions (RPTs) are associated with corporate social responsibility (CSR). Analyzing Korean public companies, we find that firms with more RPTs show poor CSR performance, especially in terms of soundness and fairness. The results are only maintained in firms with low ownership of controlling shareholders, supporting the conflict-of-interest view related to RPTs. Furthermore, we find that RPTs of firms held low by controlling shareholders do not contribute to firm value. Our results indicate that the expropriation of profits or resources through RPTs negatively affects the CSR decision of affiliations, which acts as a deterrence to long-term growth. In emerging markets where RPTs within a business group are prevalent, a government needs to restrict RPTs which are beneficial only for controlling shareholders and to encourage CSR activities of affiliations with low controlling ownership.

This study examines whether high sentiment affects auditors’ risk assessment in a less litigious environment. Specifically, we use a Korean setting with relatively low litigation risks and investigate whether audit fees are lower when firms change auditors during high sentiment times. Lower audit fees responding to high sentiment in a weak legal environment may indicate that auditors perceive the overall audit risk including reputation risk and regulation risk as low within the given period, increasing the possibility of their failure to detect managerial opportunistic behaviour. Using 17,469 Korean public firm-year observations from 2003 to 2017, we find that initial audit fees are significantly lower when investor sentiment is high, while changing auditors has no influence on audit fees when investor sentiment is low. Furthermore, this result is maintained even when auditors are changed to Big4 or industry specialist auditors (SPEC), which are known to have high ability and risk sensitivity. We also find that Big4 and SPEC initial auditors input significantly less audit hours during high investor sentiment periods, suggesting that optimistic bias caused by high sentiment makes auditors expect that relaxed audits are tolerable regardless of the legal environment.