The role of foreign institutional investors in restraining earnings management activities across countries

Lel, Uǧur

doi:10.1057/s41267-018-0195-z

Cited by 109 publications

(87 citation statements)

References 66 publications

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“…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.…”

Section: "Passive" Institutional Monitoring Channel and The Chaebol-dmentioning

confidence: 93%

“…The literature presents conflicting arguments on the respective effects of domestic and foreign institutional monitoring on earnings quality in Korea. Cheon [2], Kim and Yoon [4], and Lel [5] argue that foreign institutional monitoring is an effective mechanism in restraining corporate earnings management. In contrast, Kim et al [3], Byun and Lee [1], and Liu et al [6] argue for the effectiveness of domestic institutional monitoring.…”

Section: Other Related Studiesmentioning

confidence: 99%

“…This study revisits the question of institutional monitoring of earnings quality in Korea because prior studies have various shortcomings. Unlike the works of Kim et al [3], Kim and Yoon [4], and Lel [5], we focus on institutional investors who own 5% or more of a firm's shares because substantial ownership stakes are likely to induce institutions to engage in monitoring. Kim et al [3], Kim and Yoon [4], and Lel [5] do not reflect the heterogeneity of institutional investors but rather use aggregate institutional ownership as a proxy for institutional monitoring incentives.…”

Section: Other Related Studiesmentioning

confidence: 99%

“…Unlike the works of Kim et al [3], Kim and Yoon [4], and Lel [5], we focus on institutional investors who own 5% or more of a firm's shares because substantial ownership stakes are likely to induce institutions to engage in monitoring. Kim et al [3], Kim and Yoon [4], and Lel [5] do not reflect the heterogeneity of institutional investors but rather use aggregate institutional ownership as a proxy for institutional monitoring incentives. This choice is questionable because not all institutions have equal incentives and put forth equal efforts into monitoring managers [37].…”

Section: Other Related Studiesmentioning

confidence: 99%

“…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.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

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

Choi

et al. 2020

Sustainability

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As corporate sustainability continues to improve and enhance the principles of good corporate governance, firms are exerting increasing efforts in terms of transparency and public disclosure. Transparency efforts provide information to the general public on the relationship between corporate governance and improved sustainability. The better informed shareholders are about the connection between corporate governance and sustainability, the more apparent the relationship will become over time. Prior studies assume that blockholders engage in active institutional monitoring by intervening directly in firms’ operations. In contrast, we argue that passive institutional monitoring is a more feasible governance mechanism in the Korean market owing to the market’s unique features (i.e., chaebols and pressure sensitivity). In particular, focusing on the blockholdings of the Korean National Pension Service (KNPS), we study the impact of passive monitoring on firms’ earnings quality, represented by earnings persistence, value relevance, and timeliness. The empirical evidence shows that KNPS blockholdings have a positive and significant impact on corporate earnings quality, indicating that passive blockholder monitoring is a more efficient channel for improving earnings quality in South Korea. Our results may be generalized to other emerging markets in which a few entities with concentrated economic power engender pressure-sensitive corporate landscapes for sustainability.

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Section: "Passive" Institutional Monitoring Channel and The Chaebol-dmentioning

confidence: 93%

Section: Other Related Studiesmentioning

confidence: 99%

Section: Other Related Studiesmentioning

confidence: 99%

Section: Other Related Studiesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

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

Choi

et al. 2020

Sustainability

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show abstract

How does investor attention affect energy firms' managerial opportunistic behavior? New evidence from China

et al. 2023

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The energy sector plays a crucial role in facilitating the low‐carbon energy transition. However, in the absence of appropriate environmental regulation, managerial opportunistic behavior in energy firms can manipulate ethical investor perceptions and hinder the real transition process towards clean energy. Using Chinese listed energy firms as the research setting, this paper examines the impact of investor attention on energy firms' earnings management practices. In both clean and traditional energy firms, the results show a significant U‐shaped association between investor attention and earnings management, with the U‐shaped curve for clean energy firms being smoother. This U‐shaped relationship is more pronounced in energy firms with larger size and weaker external monitoring. Moreover, the mediating analysis shows that internal control quality transmits the impact of investor attention onto earnings management practices in the energy sector. Our key findings remain robust to a battery of robustness tests and endogeneity controls. Therefore, given the growing attention on the energy sector, this study extends the existing literature on energy firms' managerial opportunistic behavior by analyzing the nonlinear effect for investor attention and provides practical implications for curbing energy firms' managerial opportunistic activities and guiding managerial attention towards making real sustainable investments, thereby promoting clean energy transition and sustainable development.

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Foreign institutional investors and equity share decisions in cross‐border mergers and acquisitions

Wajda,

Bu,

Shi

2024

Global Strategy Journal

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Research SummaryThis study examines the role of foreign institutional investors in shaping acquiring firms' equity share decisions in cross‐border mergers and acquisitions (M&As). We argue that foreign institutional ownership (FIO) from a given country is positively associated with the share of equity sought in the target firm in this country because foreign institutional investors can help reduce information asymmetry between the acquiring and target firms. Moreover, this positive relationship is stronger if target firms are in countries with weaker institutional development because acquiring firms suffer from higher information asymmetry and thus are more inclined to rely on foreign institutional investors for information. Findings from a sample of 4166 cross‐border M&As by US firms lend support to our arguments.Managerial SummaryCan foreign institutional investors influence acquiring firms' equity share decisions in cross‐border M&As? We posit that local knowledge and information foreign institutional investors provide to acquiring firms can reduce uncertainty in the M&A process. Using data on cross‐border M&As by US firms, we find that high levels of FIO are positively associated with the equity sought in target firms by acquirers. This effect is stronger when target firms are located in countries with weak institutions. Our study highlights the beneficial role of FIO that firm executives should be aware of and has practical implications for how firms manage the M&A process.

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The role of foreign institutional investors in restraining earnings management activities across countries

Cited by 109 publications

References 66 publications

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

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

How does investor attention affect energy firms' managerial opportunistic behavior? New evidence from China

Foreign institutional investors and equity share decisions in cross‐border mergers and acquisitions

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