An Empirical Study on the Relationship Between Foreign Investors and Earnings Quality

Abstract

This study examines the impact of foreign investors on earnings quality in emerging capital market using Korean manufacturing firms’ panel data set, regarding competing for international investment and business opportunities during the period 2000 to 2012. This paper tests earnings quality using four proxies based on the International Financial Reporting Standards: 1) persistence, 2) value relevance, 3) conservatism, and 4) accruals quality. This research finds foreign investor is positively associated with only user needs earnings quality; persistence and value relevance. This result shows that the positive impact of foreign investor on earnings quality is evident but limited.

Earnings Quality and Foreign Investors in Gulf Cooperation Council Countries

“…Accounting-based measures only use accounting earnings and their elements, whereas market-based measures focus on accounting earnings and market returns. The study of An (2019), Perotti and Wagenhofer (2014) and Vo and Chu (2019) are useful for this study. Perotti and Wagenhofer (2014) used eight EQ proxies: persistence, predictability, smoothness (two proxies), abnormal accrual, accrual quality, ERC, and value relevance.…”

“…Vo and Chu (2019) uses only two measurements of EQ, namely, accounting measure (earnings management and earnings persistence) and market measure (earnings informativeness). An (2019) uses four proxies: persistence, conservatism, value relevance, and accruals quality. On the other side, the study of An (2019) and Vo and Chu (2019) are close to our study in terms of using the variable of foreign investors.…”

“…An (2019) uses four proxies: persistence, conservatism, value relevance, and accruals quality. On the other side, the study of An (2019) and Vo and Chu (2019) are close to our study in terms of using the variable of foreign investors.…”

“…In the first stream, a considerable number of studies focus on measuring EQ (e.g., Dechow & Dichev, 2002;Dichev et al, 2013;Holt, 2013;Leal et al, 2017;Lyimo, 2014;Nezlobin et al, 2019;Radzi et al, 2011). In the second stream, numerous studies provide evidence that EQ is an important common factor in many decision models such as foreign direct investment (An, 2019), excess returns (Perotti & Wagenhofer, 2014), foreign investors (Khalil et al, 2020;Vo & Chu, 2019), ownership structure (Ben-Nasr et al, 2015), market reaction (Ahn & Kwon, 2010), cost of equity capital (Francis et al, 2004) and firm value (Allayannis & Simko, 2009). In both streams, the studies use many common EQ proxies to measure the quality of financial reporting to provide useful information for various decision-making models.…”

“…The second stream is more prominent than above, and many studies follow this approach. For example, An (2019) used four measures, Francis et al (2004) used seven measures, and Perotti and Wagenhofer (2014) used eight measures. The present study belongs to the second stream as it selects nine EQ measures that are commonly used as reported by empirical literature and then examines the effect of EQ on foreign investors.…”