Abstract
This study discovers the relation between corporate governance factors and earnings quality and finds that increases in dividends and foreign ownership deter earnings management. The author shows that dividend increases and foreign ownership enhance earnings quality, but they appear to be substitutes in that role. In other words, as foreign ownership increases, the influence of dividends in increasing earnings quality decreases. Improving transparency through dividend increases and monitoring by foreign institutional investors are substitutes in preventing earnings management.
Highlights
This study investigates how earnings quality is improved by the interaction between foreign ownership and dividend payout policies
This study discovers that the nonlinear relationship between dividends and earnings management is explained by the monitoring of foreign investors
This section reports the impact of foreign ownership and dividend increases on earnings management
Summary
This study investigates how earnings quality is improved by the interaction between foreign ownership and dividend payout policies. Previous studies argue that institutional ownership enhances corporate governance (Chen et al, 2007; Ferreira and Matos, 2008; Lel, 2019). Most of the foreign investors are institutions that have global experience and are independent of the firm management. They can actively monitor and deter any actions by the managers that hinder firm growth and disseminate strong corporate governance. Previous studies with multinational data have observed the impact of foreign ownership and dividends on decreasing earnings manipulation by insiders (He et al, 2017; Lel, 2019). Foreign investors help actively monitor corporate governance and prevent any foul plays
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