Foreign Ownership and Real Earnings Management: Evidence from Japan

Posted: 21 Aug 2012 Last revised: 24 Dec 2015

See all articles by Jun Guo

Jun Guo

Rutgers, The State University of New Jersey - Rutgers University, Camden

Pinghsun Huang

National Cheng Kung University

Yan Zhang

State University of New York at Binghamton - School of Management

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: September 15, 2014

Abstract

Studying a sample of Japanese firms, we examine whether foreign investors exert a significant influence on earnings management through manipulation of real activities. We find that foreign investors play an independent role in restraining real earnings management, as captured by abnormal cash flow from operations, abnormal discretionary expenses, abnormal production costs, or a composite of the aforementioned three measures. These results are robust to a variety of controls, including economic fundamentals, domestic blockholdings, governance mechanisms, and endogeneity of foreign ownership. Our findings indicate that sophisticated foreign investors, with relatively few business ties to local management, improve the accounting oversight of local firms by curbing earnings manipulation via operating activities. Collectively, our evidence suggests that one potential benefit of capital market globalization is less real earnings management in particular and higher earnings quality in general.

Keywords: foreign ownership; real earnings management; earnings quality; Japan

JEL Classification: M41, F23, G32

Suggested Citation

Guo, Jun and Huang, Pinghsun and Zhang, Yan and Zhou, Nan, Foreign Ownership and Real Earnings Management: Evidence from Japan (September 15, 2014). Journal of International Accounting Research, 2015 Fall, Vol. 14, No. 2 pp. 185-213 . Available at SSRN: https://ssrn.com/abstract=2132614 or http://dx.doi.org/10.2139/ssrn.2132614

Jun Guo (Contact Author)

Rutgers, The State University of New Jersey - Rutgers University, Camden ( email )

Camden, NJ 08102
United States

Pinghsun Huang

National Cheng Kung University ( email )

1 Ta-Hsueh Road
Tainan, 701
Taiwan
+886 6 275 7575 ext 53441 (Phone)
+886 6 274 4104 (Fax)

Yan Zhang

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-6195 (Phone)
607-777-4422 (Fax)

Nan Zhou

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States

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