Foreign Ownership and Real Earnings Management: Evidence from Japan
Posted: 21 Aug 2012 Last revised: 24 Dec 2015
Date Written: September 15, 2014
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: Suggested Citation