Foreign institutional ownership and demand for accounting conservatism: evidence from an emerging market

Abstract

This study investigates how foreign institutional ownership interacts with accounting conservatism in an emerging market setting. We posit that weak investor protection and a high degree of information asymmetry between insiders and outside investors increase demand for conservative reporting in firms operating in emerging markets. Foreign investors in this setting have informational disadvantages relative to their domestic peers and have difficulties in getting access to data. Using a sample of Turkish firms, we find that foreign institutions (particularly foreign corporate investors) demand more conservative reporting in the investee firms. Moreover, we show that this association is more pronounced among firms with greater asymmetric information problems and growth opportunities. Our additional tests reveal that the direction of causality flows from foreign institutional ownership to conservatism, and not vice versa.

Earnings Quality and Foreign Investors in Gulf Cooperation Council Countries

“…For example, in KSA, as Naif and Ali (2019), the capital market 'Tadawul' is considered one of the good markets for FI, but many issues are pending and not implemented to attract more foreign investors. This result is supported by An (2019) which found no relationship between FI and EQ-CON, but it is not in line with Khalil et al (2020) which found that conservatism practices are attractive practices for foreign investors. In general, foreign investors prefer to invest in firms audited by the big 4, have less risk, and are small in size as conservatism is low.…”

“…Shubita (2015) concluded that income smoothing improves EQ in the GCC countries. With respect to the relationship between EQ and foreign investors, Khalil et al (2020) found that foreign investors demand conservative reporting of earnings. Ferreira et al (2017) reached the same conclusion regarding the foreign investors' preference for conservative reporting of earnings because they have informational disadvantage.…”

“…This study complements existing Contemporary Management Research 263 research on the association between EQ and foreign investors. Most studies in this area aim to examine the effect of foreign investors on EQ (e.g., Khalil et al, 2020;Vo & Chu, 2019), but very limited efforts are conducted to examine whether FI is influenced by different measures of EQ which is the main theme in this study.…”

“…In the first stream, a considerable number of studies focus on measuring EQ (e.g., Dechow & Dichev, 2002;Dichev et al, 2013;Holt, 2013;Leal et al, 2017;Lyimo, 2014;Nezlobin et al, 2019;Radzi et al, 2011). In the second stream, numerous studies provide evidence that EQ is an important common factor in many decision models such as foreign direct investment (An, 2019), excess returns (Perotti & Wagenhofer, 2014), foreign investors (Khalil et al, 2020;Vo & Chu, 2019), ownership structure (Ben-Nasr et al, 2015), market reaction (Ahn & Kwon, 2010), cost of equity capital (Francis et al, 2004) and firm value (Allayannis & Simko, 2009). In both streams, the studies use many common EQ proxies to measure the quality of financial reporting to provide useful information for various decision-making models.…”

Research Analysis on Emerging Technologies in Corporate Accounting

“…For all these reasons, new technologies pose challenges both for researchers and for teachers and professionals of the accounting practice, in order to form a broad and flexible vision of accounting, which allows offering a useful and reliable service in the context of permanent transformation. The use of new tools or technological supports in accounting has inherent risks in the efficient management of organizations and their link with the different markets through the dissemination of accounting information [12][13][14].…”