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Foreign capital and Earnings Management: International Evidence from Equity Market Opening

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Title:Foreign capital and Earnings Management: International Evidence from Equity Market Opening
Authors:Hou, Fangfang
Ng, Jeffrey
Rusticus, Tjomme
Xu, Xinpeng
Keywords:equity market openness
earnings management
equity finance dependence
financial constraints
Date Issued:23 Aug 2018
Abstract:The opening of equity markets to foreign investors provides financing opportunities and disrupts the stock ownership structure for firms in these markets. In this paper, we study the effects of equity market opening on firms’ earnings management. Using international firm-level data, we find a significantly positive effect of equity market openness on firms’ income-increasing earnings management. We show that there are substantial heterogeneous effects across industries and firms. The positive effect is more pronounced in industries that are more dependent on external financing and firms that are financially constrained, suggesting that firms’ intrinsic need for equity finance contributes to income-increasing earnings management behaviors. In addition, the effect is weaker in the presence of BigN auditors, indicating the monitoring effect of relatively more reputable auditors. Overall, our results suggest that incentives to attract financing when a country opens its equity market to foreign investors have a detrimental effect on domestic firms’ reporting bias.
Appears in Collections: 19 Financial: Earnings management

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