Do the electronic voting systems improve earnings quality? Evidence from Korean firms

Korean firms have employed shadow voting at the shareholders’ meeting to fulfill the minimum turnout needed to make a proceeding and decisions. If requested by the issuing company, Korean Securities Depository exercised voting rights of holding shares according to the ratios of pros and cons at the shareholders’ meeting. With shadow voting, while a number of listed firms have reached to proper resolutions of their agenda, shareholders’ rights in the corporate governance have become weak. As a result, Korean government attempted to repeal the shadow voting from 2015, but it deferred the repeal of shadow voting to 2017 if the firm adopted the electronic voting system. Against this backdrop, we investigate the impact of the electronic voting system and shadow voting on earnings quality. Using a sample of Korean firms, we find that the listed firms adopted only shadow voting make a positive real earnings management as compared to nonadopters with electronic vote and shadow vote. We also find that the positive real earnings management is reduced when the listed firms adopt the electronic vote. We also identify these effects in the analysis of the discretionary accruals. Collectively, our evidence suggests that the electronic voting systems have served its intended purpose to curve the real earnings management from shadow voting, thereby improving earnings quality.