Does Institutional Blockholder Short‐Termism Lead to Managerial Myopia? Evidence from Income Smoothing

• Author: Chune Young Chung,Chang Liu,Sang Jun Cho
• DOI: http://doi.org/10.1111/irfi.12219
• Published date: 01 September 2019
• Date: 01 September 2019

Does Institutional Blockholder

Short-Termism Lead to Managerial

Myopia? Evidence from Income

Smoothing

SANG JUN CHO

†

,CHUNE YOUNG CHUNG

†

AND CHANG LIU

‡

†

School of Business Administration, College of Business and Economics, Chung-Ang

University, Seoul, South Korea and

‡

College of Business, Hawaii Pacific University, Honolulu, HI

ABSTRACT

We examine institutional blockholders’influence on income-smoothing

practices in the Korean market, which provides an interesting setting

where family-oriented chaebols dictate the corporate landscape and

impede shareholder activism. The empirical results reveal that institu-

tional shareholders with a short-term (long-term) investment horizon

facilitate (constrain) managerial myopia. This positive (negative) associa-

tion is most evident among firms with domestic institutional investors.

Therefore, we argue that the presence of domestic institutional investors

with transient investment goals incentivizes firms’management to

smooth out earnings.

JEL Codes: G32; G34

Accepted: 13 June 2018

INTRODUCTION

Large institutional investors are often actively engaged in corporate governance,

resulting in better shareholder value and enhanced fundamental financial

health of the investee firms (Chung et al. 2015). However, the effectiveness of

institutional activism in curtailing opportunistic corporate decisions should dif-

fer between emerging markets and developed markets owing to marked differ-

ences in their market structure and development.

1

In this study, we examine the Korean market, where chaebols, or Korean

family-oriented business conglomerates, dictate the corporate landscape.

2

This

1 For example, Chung et al. (2002) and Roychowdhury (2006) show that large institutional

holdings are negatively related to managers’tendency to change reported profits toward their

desired level or range. However, this finding cannot be directly generalized to other markets.

2 According to the Korea Fair Trade Commission, chaebol firms comprised 61 business conglom-

erates and 1696 subsidiaries as of April 2015. Their total market capitalization exceeded 2258

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 19:3, 2019: pp. 693–703

DOI: 10.1111/irfi.12219