Ownership structure and managerial behavior to beat market expectation in Korea

Abstract

This paper examines whether firm's ownership structure in Korea changes managers' behavior to meet or beat market expectations. We examine whether managers manage earnings upward and/or guide analyst expectations downward to avoid negative earnings surprises. By using companies listed on the Korean Stock Exchange, we find that the inclusion of a higher proportion of foreign ownership significantly increases the probability to meet or beat market expectations. The finding suggests that the firms with higher foreign ownership try to satisfy their foreign investors who emphasize current profits by boosting the stock price. We also find that managers are less likely to avoid negative earnings surprises as large shareholders' ownership increases. The results imply that large shareholders play an internal monitoring role for managers' earnings and/or expectations management. In addition, firms with large shareholders' ownership rely less on income-increasing discretionary accruals. Our findings supports the convergence-of-interest hypothesis that as the controlling shareholder's ownership level increases, the interest of the controlling shareholder decreases managers' opportunistic behavior to manage earnings.