Foreign Ownership and Financial Reporting Quality in Private Subsidiaries

REFC – Spanish Journal of Finance and Accounting, Forthcoming

54 Pages Posted: 6 May 2016 Last revised: 12 Oct 2017

See all articles by Belen Gill-de-Albornoz

Belen Gill-de-Albornoz

Jaume I University - Department of Finance and Accounting

Simona Rusanescu

University of Groningen - Faculty of Economics and Business, Department of Accounting and Auditing

Date Written: October 09, 2017

Abstract

In a sample of large private Spanish subsidiaries, we find that the magnitude of discretionary accruals is significantly higher when the parent company is foreign than when it is local. Our tests support the thesis of recent research on earnings management strategies within multinational corporations (MNCs), suggesting that the parent company’s incentives underlie the observed negative relation between foreign ownership and financial reporting quality at the subsidiary level. In particular, we find that: (1) the tenure of the controlling shareholder has a negative incremental effect on financial reporting quality in firms under foreign control, as opposed to subsidiaries of local groups; and (2) the negative association between foreign ownership and financial reporting quality is mainly driven by the subsample of subsidiaries with parent companies located in countries with higher institutional quality than Spain.

Keywords: foreign ownership; private firms; subsidiaries; earnings management; discretionary accruals; institutional quality

JEL Classification: F23, M41, M48

Suggested Citation

Gill de Albornoz Noguer, Belen and Rusanescu, Simona, Foreign Ownership and Financial Reporting Quality in Private Subsidiaries (October 09, 2017). REFC – Spanish Journal of Finance and Accounting, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2776596 or http://dx.doi.org/10.2139/ssrn.2776596

Belen Gill de Albornoz Noguer (Contact Author)

Jaume I University - Department of Finance and Accounting ( email )

Campus del Riu Sec
12081 Castello de la Plana
Spain

HOME PAGE: http://www.uji.es

Simona Rusanescu

University of Groningen - Faculty of Economics and Business, Department of Accounting and Auditing ( email )

Nettelbosje 2
Groningen, Groningen 9747 AE
Netherlands

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