The Effect of Foreigners' Ownership on Earnings Management
Asian Tax Journal Vol. 5 No. 2 (2004), pp. 229-255
Abstract
Managers' earnings management requires information asymmetry between managers and information users. If managers and information users are symmetric-informed of managers' earnings management, information users will not follow managers' intention to make effects on their decision-makings. Therefore, in the case of a certain incentives to manage earnings, the level of earnings management will vary as the level of information asymmetry varies. We can think that as information asymmetry decreases, the possibility of market's observing earnings management will increase and the level of earnings management will be smaller than as information asymmetry increases. This study analysed the effects of information asymmetry on earnings management, using the sample of 2,992 firm-years during the ten-year period from 1990 to 2000. The firms are listed on the Korea Security Exchange as of every year-end. The information asymmetry was measured as foreign investors' ownership and the amount of earnings management was measured using modified Jones model by year and industry. The empirical results show that as foreign investors' ownership increases, the level of earnings management lowers in all the following 3 cases. 1) in the case of taking the absolute value of the amount of earnings management as a dependent variable, 2) in the case of positive earnings management, 3) in the case of negative earnings management. But, when reporting earnings decrease, the level of earnings management increases as foreign investors' ownership increases.
Keywords
- foreign investors' ownership
- earnings management
- information asymmetry
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