The Governance Gene of Blockholders: Block Acquisition and Earnings Management around the World

• In Event: International Accounting 1

Abstract

We investigate whether a firm’ corporate governance, proxied by earnings management, is influenced by its blockholders’ governance. Using an international sample of 892 block acquisitions across 42 countries over the period from year 1990 to 2008, we find that target firms’ earnings management is aligned with that of block acquirers, by analogy with governance genes transferred from blockholders to their holding firms. We identify three economic mechanisms underlying the governance transfer effect of blockholding: monitoring expertise, monitoring cost, and monitoring power. Specifically, the governance transfer effect is more pronounced when blockholders involve in less earnings management, when blockholders are geographically or operationally proximate to the holding firms, and when the holding firms are in countries with weaker institutions for investor protection.

Authors

• Lili Dai, Australia National Universtiy

• Ravi Dharwadkar, Syracuse University

• Linna Shi, SUNY-Binghamton

• Bohui Zhang, university of new south wales