Does Hometown Advantage Matter? The Case of Institutional Blockholder Monitoring on Earnings Management in Korea

Journal of International Business Studies, Forthcoming

Kelley School of Business Research Paper No. 17-58

54 Pages Posted: 11 Aug 2017 Last revised: 17 Aug 2017

See all articles by Chang Liu

Chang Liu

California State University, Sacramento

Chune Young Chung

Chung-Ang University - College of Business & Economics

Hong Kee Sul

Chung-Ang University - College of Business & Economics

Kainan Wang

University of Toledo

Date Written: May 1, 2017

Abstract

This study uses a large sample of Korean firms to examine institutional blockholders’ influence on corporate earnings management. The Korean market is an interesting setting to study institutional monitoring because it is dominated by chaebols, which are characterized by ineffective internal governance mechanisms. We find evidence that institutional blockholders deter opportunistic financial reporting, and such activities are the most evident among domestic institutional blockholders. Foreign institutional blockholders, especially those with short-term investment objectives, lead to more discretionary reporting. Our findings are robust to various empirical models and endogeneity checks. Moreover, this study offers new insight into the proximity advantage of domestic institutional investors with regard to monitoring information. It also highlights institutional investors’ roles in shaping corporate governance in emerging markets, in which sound corporate governance has become increasingly important for firms’ long-term sustainability. One important policy implication is that regulatory authorities should aim to promote institutional investors’ participation in these markets.

Keywords: Agency Theory; Institutional Domestic and Foreign Investors; Earnings Management; Corporate Governance in Emerging Markets; Institutional Monitoring; Blockholders; Multiple Regression Analysis

Suggested Citation

Liu, Chang and Chung, Chune Young and Sul, Hong Kee and Wang, Kainan, Does Hometown Advantage Matter? The Case of Institutional Blockholder Monitoring on Earnings Management in Korea (May 1, 2017). Journal of International Business Studies, Forthcoming, Kelley School of Business Research Paper No. 17-58, Available at SSRN: https://ssrn.com/abstract=3016953

Chang Liu

California State University, Sacramento ( email )

6000 J Street
Sacramento, CA 95819-6082
United States

Chune Young Chung

Chung-Ang University - College of Business & Economics ( email )

84 Heuk-suk Ro
Seoul
Korea, Republic of (South Korea)

Hong Kee Sul

Chung-Ang University - College of Business & Economics ( email )

84 Heuk-suk Ro
Seoul
Korea, Republic of (South Korea)

Kainan Wang (Contact Author)

University of Toledo ( email )

Neff Department of Finance
Mail Stop 103
Toledo, OH 43606
United States

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