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

AuthorChune Young Chung,Chang Liu,Sang Jun Cho
Date01 September 2019
Published date01 September 2019
Does Institutional Blockholder
Short-Termism Lead to Managerial
Myopia? Evidence from Income
School of Business Administration, College of Business and Economics, Chung-Ang
University, Seoul, South Korea and
College of Business, Hawaii Pacic University, Honolulu, HI
We examine institutional blockholdersinuence 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 rms with domestic institutional investors.
Therefore, we argue that the presence of domestic institutional investors
with transient investment goals incentivizes rmsmanagement to
smooth out earnings.
JEL Codes: G32; G34
Accepted: 13 June 2018
Large institutional investors are often actively engaged in corporate governance,
resulting in better shareholder value and enhanced fundamental nancial
health of the investee rms (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.
In this study, we examine the Korean market, where chaebols, or Korean
family-oriented business conglomerates, dictate the corporate landscape.
1 For example, Chung et al. (2002) and Roychowdhury (2006) show that large institutional
holdings are negatively related to managerstendency to change reported prots toward their
desired level or range. However, this nding cannot be directly generalized to other markets.
2 According to the Korea Fair Trade Commission, chaebol rms 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. 693703
DOI: 10.1111/ir.12219

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