Foreign institutional ownership and demand for accounting conservatism: evidence from an emerging market

Mohamed Khalil, Aydin Ozkan, Yilmaz Yildiz

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Abstract

This study investigates how foreign institutional ownership interacts with accounting conservatism in an emerging market setting. We posit that weak investor protection and a high degree of information asymmetry between insiders and outside investors increase demand for conservative reporting in firms operating in emerging markets. Foreign investors in this setting have informational disadvantages relative to their domestic peers and have difficulties in getting access to data. Using a sample of Turkish firms, we find that foreign institutions (particularly foreign corporate investors) demand more conservative reporting in the investee firms. Moreover, we show that this association is more pronounced among firms with greater asymmetric information problems and growth opportunities. Our additional tests reveal that the direction of causality flows from foreign institutional ownership to conservatism, and not vice versa.

Original languageEnglish
Article number1811
Number of pages27
JournalReview of Quantitative Finance and Accounting
Volume55
Issue number1
Early online date10 Sep 2019
DOIs
Publication statusPublished - 1 Jul 2020

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