Foreign Equity Ownership and Income Smoothing
47 Pages Posted: 13 Aug 2020
Date Written: May 1, 2020
Abstract
We examine whether foreign investors influence a local firm’s income smoothing, using a sample of Korean firms from 2000 to 2013. We hypothesize that given innate informational difficulties of overseas investments, foreign investors demand less noisy and more sustainable earnings, and to satisfy this demand, managers have strong incentives to smooth earnings. We find that foreign investors’ ownership is positively related to the level of earnings smoothing. We also find that earnings smoothing improves earnings informativeness in the presence of high foreign-investor ownership, consistent with the notion that foreign investors play an important role in local firms’ information environments.
Keywords: foreign investors; institutional investors; earnings management; income smoothing; earnings informativeness
JEL Classification: M41; M43; J53
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