Drivers Behind the Monitoring Effectiveness of Global Institutional Investors: Evidence from Earnings Management

52 Pages Posted: 8 Aug 2013 Last revised: 27 Jun 2016

See all articles by Incheol Kim

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship

Steve Miller

University of South Florida - Muma College of Business

Hong Wan

State University of New York at Oswego

Bin Wang

Marquette University - College of Business Administration

Date Written: May 27, 2016

Abstract

This paper studies the drivers behind the monitoring effectiveness of institutional investors in curbing earnings management in an international setting. We identify three distinct drivers and propose two competing hypotheses: the hometown advantage hypothesis predicts that because of proximity to monitoring information, domestic institutions have a comparative advantage over foreign institutions in deterring earnings management, whereas the global investor hypothesis predicts that foreign institutions have a comparative advantage because of their proclivity toward activism and ability to deploy superior monitoring technologies. Consistent with the hometown advantage hypothesis, in aggregate, domestic, but not foreign, institutional ownership is associated with less earnings management; the monitoring effectiveness of foreign institutions improves as they gain proximity to monitoring information. Consistent with the global investor hypothesis, the monitoring effectiveness of foreign institutions improves in environments of greater agency conflicts or weaker governance controls or when the gap in monitoring technology between foreign and domestic institutions widens.

Keywords: Geographic distance, Institutional investors, Earnings management, Corporate governance

JEL Classification: G15, G2, G32, G34, M41

Suggested Citation

Kim, Incheol and Miller, Steve and Wan, Hong and Wang, Bin, Drivers Behind the Monitoring Effectiveness of Global Institutional Investors: Evidence from Earnings Management (May 27, 2016). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2305769 or http://dx.doi.org/10.2139/ssrn.2305769

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

Steve Miller (Contact Author)

University of South Florida - Muma College of Business ( email )

Sarasota, FL 33620
United States

Hong Wan

State University of New York at Oswego ( email )

School of Business
Oswego, NY 13126
United States

Bin Wang

Marquette University - College of Business Administration ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

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