Does hometown advantage matter? The case of institutional blockholder monitoring on earnings management in Korea

Does Institutional Blockholder Short‐Termism Lead to Managerial Myopia? Evidence from Income Smoothing

“…The p ‐value of BO_F shown in Column 3 and those of BO_S_F and BO_L_F in Columns 4 and 5, respectively, indicate that, statistically, foreign institutions have little impact on Korean firms’ behavior. This finding supports the mainstream results that domestic institutional investors enjoy proximity advantages over their foreign counterparts (Ayers et al ; Liu et al ).…”

“…For example, Liu et al () note that because domestic institutional investors are geographically close by to local firms, they are familiar with the local laws, regulations, accounting rules, and culture. This proximity advantage enables domestic investors to spot financial irregularities relatively easily and to monitor firms with less cost and effort than that required by their foreign peers.…”

“…5Arya et al (1998) andFudenberg and Tirole (1995) propose that managers may seek to temporarily deceive investors by opportunistically manipulating accounting figures for personal welfare, such as job-security and bonus compensation, among other reasons. 6 For example,Liu et al (2018) note that because domestic institutional investors are geographically close by to local firms, they are familiar with the local laws, regulations, accounting rules, and culture. This proximity advantage enables domestic investors to spot financial irregularities relatively easily and to monitor firms with less cost and effort than that required by their foreign peers.© 2018 International Review of Finance Ltd. 2018…”

Does Sustainable Corporate Governance Enhance Accounting Practice? Evidence from the Korean Market

“…Although empirical evidence confirms the existence of an institutional monitoring effect on earnings quality in Korea [1][2][3][4][5][6], we believe that blockholders in Korea influence managerial decision-making regarding firms' operations through passive monitoring rather than direct intervention. Edmans [25] and Admati and Pfleiderer [26] claim that even when large institutional investors are unable to intervene in firms' activities and can only sell their stakes or threaten to do so ("threat of exit"), these investors may influence managerial behavior.…”

“…Although the literature largely substantiates the institutional monitoring effect in Korea [1][2][3][4][5][6], the channel through which blockholders, that is, institutional investors with large shareholdings in firms, affect managerial behavior requires further consideration. Previous studies mainly assume that Korean blockholders actively participate in institutional monitoring.…”