What Determines Meals and Entertainment Expenditures, and How Much Income-Contributing Are They?

This study theoretically analyzes the components of M&E expenditures and examines whether real-world variables affect each component and the aggregate value of those expenditures. Employed real-world variables mainly represent external services from various outside parties and the characteristics of governance system. Furthermore, this study examines how much income-contributing M&E expenditures are to explore the comprehensive features of those expenditures. Using financial data from the KSE and the KOSDAQ firms between 2001 and 2006, the results of this study show that firms are likely to pay the productive M&E expenditures to attain the optimal level of the relationship capital to maximize the net profit, however that those expenditures generally have a strong inclination toward the manager’s private consumption. This study also shows that, from view of corporate governance, income is weighted heavily in managerial evaluation in Korea with the analysis of M&E expenditures. These findings suggest that, although small proportion of M&E expenditures is exploited for productive use, those expenditures might be generally diverted for other uses. Compared with previous studies, this study, which tries real-world applications in the ground of in-depth mathematical modeling and its analysis, will contribute to a balanced development in the study on M&E expenditures.