Foreign institutional investment horizon and earnings management: Evidence from around the world

Rehman U. Mian, Saadia Irfan and Affan Mian

International Review of Financial Analysis, 2023, vol. 86, issue C

Abstract: This paper investigates whether and how the investment horizon relates to foreign institutional monitoring in constraining the self-interested managerial use of earnings management for a sample of firms from 29 countries. We find that equity ownership by long-term foreign institutional investors, irrespective of the strength of institutional controls in their home countries, is associated with lesser earnings management. Accounting for the significance of information asymmetry in earnings management and the ability of long-term foreign institutional investors to mitigate the information disadvantage associated with cross-border equity investments, we find that the constraining effect is stronger in firms with weaker information environments. Finally, using multiple proxies for the country- and firm-level agency, we find that monitoring by long-term, rather than short-term, foreign institutional investors is significantly effective in limiting earnings management in environments of severe agency conflicts. Overall, our findings draw attention to the heterogeneity in the monitoring role played by foreign institutional investors in influencing the financial reporting quality.

Keywords: Foreign institutional ownership; Earnings management; Investment horizon; International corporate governance (search for similar items in EconPapers)
JEL-codes: G23 G34 M40 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s105752192300025x

DOI: 10.1016/j.irfa.2023.102509

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