Threat of Exit by Non-blockholders and Income Smoothing: Evidence from Foreign Institutional Investors in Japan

Posted: 10 Jan 2022

See all articles by Parthiban David

Parthiban David

American University - Kogod School of Business

Augustine Duru

American University - Kogod School of Business

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Johan Maharjan

Rensselaer Polytechnic Institute (RPI)

Yijiang Zhao

American University - Kogod School of Business

Date Written: December 31, 2021

Abstract

We examine how the threat of exit by non-blockholders (investors with ownership < 5%) relates to firms’ income smoothing. Unlike informed blockholders, non-blockholders lack private information and therefore rely more on reported accounting numbers to evaluate firm performance. To isolate the exit threat, we use the unique setting in Japan where strong firm-centric social norms and lack of insider access lead non-blockholding foreign institutions to influence management primarily through the threat of exit. We predict and find that foreign non-blockholders’ exit threat is positively associated with the extent of income smoothing. This effect is more pronounced for firms less embedded in Japan’s stakeholder-based system, firms with greater stock liquidity, and firms with higher US institutional ownership. In addition, smoothing associated with such an exit threat, on average, is informative. Our findings suggest that Japanese firms under non-blockholders’ exit threat increase income smoothing to reduce perceived uncertainty and that such smoothing generally meets non-blockholders’ information needs.

Keywords: non-blockholder exit threat, foreign institutional investor, income smoothing, stock price informativeness, stock market pressure, stakeholder-based system

Suggested Citation

David, Parthiban and Duru, Augustine and Lobo, Gerald J. and Maharjan, Johan and Zhao, Yijiang, Threat of Exit by Non-blockholders and Income Smoothing: Evidence from Foreign Institutional Investors in Japan (December 31, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4003366

Parthiban David

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

Augustine Duru

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
202-885-1937 (Phone)
202-885-1992 (Fax)

Gerald J. Lobo (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Johan Maharjan

Rensselaer Polytechnic Institute (RPI) ( email )

Troy, NY 12180
United States

Yijiang Zhao

American University - Kogod School of Business ( email )

4400 Massachusetts Ave, NW
Washington, DC 20016
United States
202-885-1941 (Phone)

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

Paper statistics

Abstract Views
54
PlumX Metrics