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Does hometown advantage matter? The case of institutional blockholder monitoring on earnings management in Korea

Chang Liu (), Chune Young Chung (), Hong Kee Sul () and Kainan Wang ()
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Chang Liu: Hawaii Pacific University
Chune Young Chung: Chung-Ang University
Hong Kee Sul: University of Pennsylvania
Kainan Wang: University of Toledo

Journal of International Business Studies, 2018, vol. 49, issue 2, 196-221

Abstract: 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; domestic and foreign institutional investors; earnings management; corporate governance in emerging markets; institutional monitoring; blockholders; multiple regression analysis (search for similar items in EconPapers)
Date: 2018
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