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Earnings management and government restrictions on outward foreign direct investment: evidence from Taiwanese firms

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  • Rong-Ruey Duh
  • Audrey Hsu
  • Sidney Leung

Abstract

This study examines whether firms engage in earnings management to overcome government policies on limiting outward foreign direct investment (FDI), and whether their earnings-management behavior is aligned with shareholders’ interests. Using the regulatory setting in Taiwan, where the government has placed a cap on FDI in China for listed firms, we find that firms with FDI ratios near the limit (near-limit firms) are more likely to engage in income-increasing earnings management to shore up their shareholders’ equity, thus reducing their propensity to breach government policy. In addition, near-limit Taiwanese firms engaged in income-increasing earnings management show greater increases in FDI in China and better performance in the years following their earnings-management activities. We also find that the positive effects of earnings management on the future performance of these firms are driven by incremental FDI in China. The effects are more pronounced in firms with strong corporate governance. The results suggest that when the government’s restrictions on outward FDI are inconsistent with an individual firm’s objective of maximizing shareholder value, managers are motivated to use earnings-management strategies to circumvent governmental constraints on outward FDI. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Rong-Ruey Duh & Audrey Hsu & Sidney Leung, 2015. "Earnings management and government restrictions on outward foreign direct investment: evidence from Taiwanese firms," Review of Quantitative Finance and Accounting, Springer, vol. 44(1), pages 41-67, January.
    • Handle: RePEc:kap:rqfnac:v:44:y:2015:i:1:p:41-67
    DOI: 10.1007/s11156-013-0398-0
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    Cited by:

    1. Chen, Chien-Hsun, 2023. "Prospects for Taiwan’s Outward Investment in China," MPRA Paper 116578, University Library of Munich, Germany.
    2. Zhaorui Guo & Kam C. Chan & Yunkui Xue, 2016. "The Impact of Corporate Culture Disclosure on Performance: A Quantitative Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-29, June.

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    More about this item

    Keywords

    Foreign direct investment; Foreign direct investment policy; Earnings management; Regulatory restriction; F21; G18; K20; M41;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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