The Effects of Legal Protections and Control-Ownership Divergences on Investor Perceptions of Foreign Earnings

Journal of Financial Regulation and Compliance, Vol. 21, Iss: 2, pp.164-187

Pace University Accounting Research Paper No. 2013/07

Posted: 13 Dec 2013

See all articles by Chen-lung Chin

Chen-lung Chin

National Chengchi University (NCCU) - Department of Accounting

Yu-Ju Chen

Asia University

Gary Kleinman

Montclair State University

Picheng Lee

Pace University - Department of Accounting

Date Written: May 12, 2013

Abstract

The purpose of this study is to investigate the impact of corporate internationalization, governance structures, and legal protections on the foreign earnings response coefficient (FERC). The FERC is a measure of the value-relevance of foreign earnings. We collected data on 3653 Taiwanese firms that had overseas investments. We examined the impact of the site of their overseas investments and the nature of the legal code of the investee country on the investor perceptions of firms’ reported foreign and domestically-generated earnings. We also examined the impact of corporate governance arrangements (e.g., the difference between the owners’ cash flow and voting rights on the same components of the firms’ earnings.

Our empirical findings suggest that an aggressive internationalization strategy (foreign direct investment) has positive effects on the value relevance of foreign earnings, but that this strategy is impacted by the firm’s own corporate governance arrangements and the target of its overseas investment efforts. While foreign investments bring about growth and profits it exposes the investors to the risk of expropriation by investee countries and corporate insiders.

Keywords: internationalization, corporate governance, investor legal protection, value relevance of foreign earnings

JEL Classification: G34, G38, M41

Suggested Citation

Chin, Chen-lung and Chen, Yu-Ju and Kleinman, Gary and Lee, Picheng, The Effects of Legal Protections and Control-Ownership Divergences on Investor Perceptions of Foreign Earnings (May 12, 2013). Journal of Financial Regulation and Compliance, Vol. 21, Iss: 2, pp.164-187; Pace University Accounting Research Paper No. 2013/07. Available at SSRN: https://ssrn.com/abstract=2366971

Chen-lung Chin

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan, Taipei
Taiwan

Yu-Ju Chen

Asia University ( email )

500 Liuofeng Rd, Wufeng, Taichung
Taichung
Taiwan

Gary Kleinman

Montclair State University ( email )

NJ 07043
United States

Picheng Lee (Contact Author)

Pace University - Department of Accounting ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

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