Earnings Management to Attract Foreign Capital: International Evidence from Equity Market Openings

64 Pages Posted: 30 May 2019 Last revised: 26 May 2020

See all articles by Fangfang Hou

Fangfang Hou

Xiamen University

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Tjomme O. Rusticus

Hong Kong Polytechnic University - School of Accounting and Finance

Xinpeng Xu

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: May 23, 2020

Abstract

When equity markets open to foreign investors, firms in these markets face significant opportunities to attract foreign capital. Using a set of countries that opened their equity markets, we find significant income-increasing earnings management in the year of opening, with substantial heterogeneity across industries and firms. The positive effect is more pronounced in industries that are more dependent on external financing and for financially constrained firms, suggesting that firms’ intrinsic need for equity finance contributes to income-increasing earnings management behaviors. The effect is weaker when the firm is audited by a Big N auditor, consistent with the monitoring effect of relatively more reputable auditors. We find that income-increasing earnings management is less pronounced in countries with stronger legal enforcement. Overall, our results suggest that incentives to attract financing when a country opens its equity market to foreign investors affects firms’ reporting bias.

Keywords: equity market opening, earnings management, equity finance dependence

JEL Classification: G15, G18, M41, M43

Suggested Citation

Hou, Fangfang and Ng, Jeffrey and Rusticus, Tjomme O. and Xu, Xinpeng, Earnings Management to Attract Foreign Capital: International Evidence from Equity Market Openings (May 23, 2020). Available at SSRN: https://ssrn.com/abstract=3383843 or http://dx.doi.org/10.2139/ssrn.3383843

Fangfang Hou

Xiamen University ( email )

Xiamen, Fujian 361005
China
05922183916 (Phone)
361005 (Fax)

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Tjomme O. Rusticus (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Xinpeng Xu

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
113
Abstract Views
953
rank
300,454
PlumX Metrics