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

초록

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.

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