Title: Testing the external monitoring hypothesis on earnings management: a case of business groups in South Korea

Authors: Young K. Chang; Pyung K. Kang; Won-Yong Oh; Minsup Song

Addresses: Sogang Business School, Sogang University, 35 Baekbeom-ro, Mapo-gu, Seoul 04107, South Korea ' Sogang Business School, Sogang University, 35 Baekbeom-ro, Mapo-gu, Seoul 04107, South Korea ' Lee Business School, University of Nevada, Las Vegas (UNLV), Las Vegas, Paradise, Nevada, USA ' Sogang Business School, Sogang University, 35 Baekbeom-ro, Mapo-gu, Seoul 04107, South Korea

Abstract: Previous studies on earnings management largely focused on the roles of internal governance mechanisms. However, an important but under-explored 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 data set 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; earnings management; corporate governance; business group Chaebol.

DOI: 10.1504/EJIM.2024.140923

European Journal of International Management, 2024 Vol.24 No.2, pp.212 - 242

Received: 01 Sep 2019
Accepted: 17 Feb 2020
Published online: 04 Sep 2024 *

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