Publication Type

Journal Article

Version

acceptedVersion

Publication Date

11-2023

Abstract

This study investigates the effects of foreign return-oriented shareholders and domestic relational shareholders of Japanese companies on the earnings management behavior of their invested firms when stock option pay is adopted. We theorize that foreign shareholders seek short-term returns and do not engage in close monitoring due to an information disadvantage while domestic shareholders prevent managerial behavior that distorts information disclosure. Our findings show that managers of firms that use stock option pay engage in earnings management to increase their private financial benefits and meet capital markets’ expectations, which allows them to enhance their own reputation. However, this managerial behavior is contingent on the firm’s ownership structure. Our results show that while foreign shareholders enhance the positive impact of stock options on earning management, domestic shareholders and affiliated directors mitigate this positive effect. Our empirical analyses support the argument that ownership heterogeneity is a key determinant of managerial propensity to engage in earnings management when Japanese firms adopt stock option pay.

Keywords

Earnings management, Relational governance, Japan

Discipline

Corporate Finance | Strategic Management Policy

Research Areas

Strategy and Organisation

Publication

Strategic Organization

Volume

21

Issue

4

First Page

827

Last Page

855

ISSN

1476-1270

Identifier

10.1177/14761270211069609

Publisher

SAGE Publications

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1177/14761270211069609

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