The Role of Foreign Institutional Investors in Restraining Earnings Management Activities across Countries
49 Pages Posted: 24 Feb 2013 Last revised: 12 Dec 2018
Date Written: December 21, 2016
This study investigates the role of foreign institutional investors (FIIs) in restraining earnings management activities of firms under varying levels of investor protection. Firms manage their earnings less when independent FIIs are among their shareholders, especially when monitoring is more valuable – in presence of weak investor protection rights and greater growth opportunities. These effects are robust to a quasi-exogenous shock to FIIs’ shareholdings, unobserved firm heterogeneity, and alternative earning management measures. FIIs are associated with an increase in foreign director presence on corporate boards and audit committees.
Keywords: corporate governance, earnings management, foreign and domestic institutional investors, investor protection, management incentives, monitoring
JEL Classification: G23, G34, M41
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