Do foreign institutional investors monitor opportunistic managerial behaviour? Evidence from real earnings management

Xiaolong Gu, Zhe An, Chen Chen, Donghui Li

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Employing a large sample of 13,860 firms in 41 economies from 2000 to 2017, we document that the ownership by foreign institutional investors (FIIs) is negatively associated with firms' real earnings management (REM) but unrelated to their accrual earnings management (AEM). We adopt a few identification strategies to tackle the endogeneity issues, including firm- and year-fixed effects regression, two-stage least squares (2SLS) regression, and difference-in-differences (DiD) estimation based on the passage of the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). In addition, we show that the role of FIIs in curbing REM is achieved through the expertise channel and the monitoring channel. These results suggest that when facing disadvantages in curbing AEM, FIIs make the most of their monitoring strengths by curbing firms' REM, where they have both incentives and capabilities to monitor. Overall, this study highlights the important role of FIIs in monitoring opportunistic managerial behaviour.

Original languageEnglish
Number of pages35
JournalAccounting & Finance
DOIs
Publication statusAccepted/In press - 2022

Keywords

  • accrual earnings management
  • foreign institutional investors
  • real earnings management

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