Yohan An, Yohan An
(2015)
Does Foreign Ownership Increase Financial
Reporting Quality?
Asian Academy of Management Journal (AAMJ), 20 (2).
pp. 1-21.
ISSN 1394-2603
Abstract
Using panel data, this paper investigates how foreign ownership affects the financial
reporting quality of firms listed on the Korean Stock Exchange (KSE), one of the highest
foreign-investor capital markets in the world during the period from 2000 to 2005.
Existing studies suggest that foreign ownership may either increase or decrease the
quality of financial reporting, suggesting that foreign ownership is explained using two
conflicting hypotheses: The active-monitoring hypothesis and the transient hypothesis. In
emerging markets, where family ownership is predominant, conservatism is an important
measure of financial reporting quality because conservatism decreases opportunistic
management behaviours and mitigates information asymmetries. This paper tests
conservatism as a proxy for financial reporting quality using three piecewise accrual
models, proposed by Ball and Shivakumar (Journal of Accounting Research, 44, 207–256
(2006)); the cash flow model, the Dechow and Dichev model, and the Jones model. This
research finds that foreign ownership is positively associated with conservatism in all
three models. This result supports the active-monitoring hypothesis of foreign ownership,
indicating that foreign ownership mitigates managerial opportunism, thereby increasing
the quality of financial reporting
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