Testing the External Monitoring Hypothesis on Earnings Management: A Case of Business Groups in South Korea

Document Type

Article

Publication Date

1-1-2021

Publication Title

European Journal of International Management

Volume

1

Issue

1

Abstract

Previous studies on earnings management largely focused on the roles of internal governance mechanisms. However, an important but underexplored issue in the earnings management literature is how external stakeholders affect a firm's earnings management practice. We propose an external monitoring hypothesis ? earnings management is better monitored by external stakeholders when internal governance mechanisms are weak. Using a dataset of Korean Chaebol (business group) firms, we found that earnings management practices decrease when group-level and firm-level visibilities are salient. Our findings are consistent with the external monitoring hypothesis, suggesting that external monitoring mechanisms play significant roles in shaping a firm's behaviour.

Keywords

External monitoring; Earniings management; Corporate governance; Business group; Chaebol

Disciplines

Business | Finance and Financial Management

Language

English

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