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The question is whether the financial reform has produced desirable outcomes in the Korean financial reporting system. Prior studies indicate that accounting properties depend upon many factors, such as the quality of accounting standards, managers’ incentives, economic determinants and others (Ball et al. 2003; Ahmed et al. 2013). For example, in the post-financial reform period, jobs are no longer secure in Korea. Rather, retention and promotion are determined based on performance evaluation. In particular, upper-level managers work under stress to meet business goals. Since the ultimate goal of managers is to survive by delivering expected performance outcomes, they would have increased incentives to manage earnings in the post-financial reform period.

Further, the reformed financial systems in Korea are structured to reduce managers’ opportunistic choices of accruals in measuring earnings. However, managers could still manage earnings through real business activities, such as the timing of production and sales and adjusting discretionary expenditures (Greenspan 2002; Fuller and Jensen 2002; Graham et al. 2005). Cohen et al. (2008) and Cohen and Zarowin (2010) report empirical findings that support substitution of real earnings management for accruals management after the Sarbanes-Oxley Act was enacted in 2002. As a result, this study examined three research questions: 1) whether improved accounting standards in the post-financial reform period are sufficient enough to deter accruals management, 2) whether real earnings management has been substituted for accruals management in the post- financial reform period because of increases in potential costs associated with accrua