Testing the External Monitoring Hypothesis on Earnings Management: A Case of Business Groups in South Korea
European Journal of International Management
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.
External monitoring; Earniings management; Corporate governance; Business group; Chaebol
Business | Finance and Financial Management
Chang, Y. K.,
Kang, P. K.,
Testing the External Monitoring Hypothesis on Earnings Management: A Case of Business Groups in South Korea.
European Journal of International Management, 1(1),