Economic and Policy Uncertainty and the Opacity of Financial Reporting

초록

This study empirically investigates the impact of economic and policy uncertainty (EPU and NEPU) on the opacity of corporate financial reporting (OPAQUE). To measure financial reporting opacity, we adopt the methodologies proposed by Hutton et al. (2009) and Park and Jeon (2017), and conduct regression analyses accordingly. Furthermore, we examine the heterogeneous effects of uncertainty across different market segments—namely, the KOSPI and KOSDAQ markets—and across firms with varying levels of corporate governance, proxied by ESG Governance (G) scores. Our empirical results reveal several key findings. First, increases in economic and policy uncertainty are significantly associated with heightened levels of financial reporting opacity. Second, this effect is more pronounced in firms listed on the KOSDAQ market, suggesting that these firms are more vulnerable to economic and economic and policy uncertainty in terms of financial reporting quality compared to their KOSPI counterparts. Third, when firms are categorized based on their governance scores, the positive association between economic and economic and policy uncertainty and opacity is found to be statistically significant only among firms with relatively low governance scores. This result implies that firms with robust governance structures are more likely to maintain high-quality and consistent financial reporting practices, even under conditions of elevated economic and policy uncertainty, whereas those with weaker governance are more susceptible to opacity and volatility in their disclosures. These findings suggest that during periods of heightened economic and policy uncertainty, firms operating in the KOSDAQ market and those with weaker governance mechanisms are more prone to engaging in unreliable accounting practices. Accordingly, there is a critical need to enhance disclosure regulations and strengthen oversight mechanisms for these firms. By empirically identifying the relationship between economic and policy uncertainty and financial reporting opacity, this study contributes to the literature on financial reporting quality. Moreover, it provides important policy implications by highlighting the differential effects of economic and policy uncertainty based on firm-specific characteristics, particularly market type and governance strength. Future research may consider employing alternative measures of financial reporting quality, such as the model proposed by Dechow and Dichev (2002), or incorporating more granular governance variables, including board independence and internal audit functions.

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