International Diversification, Ownership Structure, Legal Origin, and Earnings Management: Evidence from Taiwan

Abstract

The primary objective of this study is to investigate the impact of corporate internationalization on earnings management. We also explore the mitigating roles of corporate ownership structure, as measured by divergence of controlling owner's control and cash rights, and the proportion of firms that operate in common law countries on earnings management. Using a sample drawn from Taiwan, we find that greater corporate internationalization is associated with a higher level of earnings management, as proxied by discretionary accruals and the likelihood of exactly meeting or just beating analyst forecast. Corporate internationalization is measured by the ratio of foreign assets to total assets, foreign operational country scope, and the number of foreign investees, respectively. In addition, we find that companies can reduce the negative effects of internationalization on earnings management by improving their corporate ownership structures or investing in a higher proportion of common law countries where there is a better investor legal protection environment and higher information transparency.

Corporate governance, accounting and finance: A review

“…Cormier and Martinez (2006) find greater earnings management in the year following an IPO among French firms that provide earnings forecasts and have weak CG. Chin et al (2009) find foreign ownership in Taiwanese firms is positively associated with earnings management to meet or beat the target level of earnings. This suggests a need to meet the performance expectations of external owners.…”

Corporate social responsibility, real activities earnings management, and corporate governance: evidence from Korea

“…Lin and Hwang (2010) use a meta-analysis of 48 prior studies to report that the independence and expertise of a BOD; audit committee independence, size, and expertise; and number of meetings are negatively associated with EM, primarily measured using ABEM. Specifically, a BOD (Sarkar, Sarkar, and Sen 2008;Chen, Elder, and Hsieh 2011), audit committee (Prawitt, Smith, and Wood 2009), institutional investors (Ajinkya, Bhojraj, and Sengupta 2005), and foreign investors (Chin, Chen, and Hsieh 2009) are associated with a firm's EM. Although most studies support the contention that CG helps reduce a firm's EM, the results of prior studies are still mixed.…”

The Influence of Culture and Legal Origin Toward Earnings Management of Manufacture Firms Listed in NYSE

“…Thus, it can be the best solution to solve information asymmetric problem between manager and finance report user [2,11]. Strong law protection for the investor of this common-law stock market oriented is able to limit the insider ability to do some activities that can add their private advantages, included decreasing incentive to cover the real company quality [12].…”