THE EFFECT OF THE FIRM'S MONOPOLY POWER ON THE EARNINGS RESPONSE COEFFICIENT

A study provides further evidence on the determinants of the earnings response coefficient (ERC). Using a firm valuation model that explicitly incorporates the degree of monopoly power in its product markets, it is demonstrated that ERC is positively related to the firm's monopoly power. This theoretical prediction is empirically examined using a sample of 144 Korean firms listed in the Korean Stock Exchange during the period extending from 1986 to 1992. The sample firm's monopoly power is measured by whether or not the firm is designated as a market-dominant enterprise by the Korean Fair Trade Commission according to the Monopoly Regulation and Fair Trade Act. Such designation implies that the firm has a monopoly power. The empirical results are generally consistent with the theoretical prediction. Specifically, the ERC is higher for the designated firms than for the non-designated firms. This result is robust across different methods.