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When institutions passively curb earnings management: Evidence from the Korean market

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  • Chung, Chune Young
  • Hwang, Ji Hoon
  • Kim, Donghyun
  • Liu, Chang

Abstract

The extant literature largely assumes active institutional monitoring as a main channel through which institutional investors restrain earnings management. However, because the Korean market is dominated by family-oriented chaebols with deficient corporate governance, we believe that passive institutional monitoring is more feasible. Using institutional portfolio turnover as a proxy for the degree of passive monitoring, we assume that institutions with higher turnovers pose a more credible threat of selling-off, thereby inducing managers to act in shareholders’ interest. Extending the research supporting the informational advantage of domestic institutions, this study presents empirical evidence that domestic institutions that perform passive monitoring are most effective in curbing earnings management in the Korean market.

Suggested Citation

  • Chung, Chune Young & Hwang, Ji Hoon & Kim, Donghyun & Liu, Chang, 2018. "When institutions passively curb earnings management: Evidence from the Korean market," Finance Research Letters, Elsevier, vol. 25(C), pages 274-279.
    • Handle: RePEc:eee:finlet:v:25:y:2018:i:c:p:274-279
    DOI: 10.1016/j.frl.2018.02.033
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    Cited by:

    1. Popli, Manish & Raithatha, Mehul & Goyal, Lakshmi, 2022. "Avoiding the risk of de-legitimation: Impact of internationalization on earnings management of emerging market firms," Finance Research Letters, Elsevier, vol. 48(C).

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    More about this item

    Keywords

    Passive institutional monitoring; Earnings management; Chaebol; Corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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