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ABSTRACT
This study investigates the relation between conservative reporting and foreign institutional ownership using a unique dataset of firms in Turkey. In doing so, we distinguish between foreign funds and corporations. Contrary to prior findings, our analysis shows that conservative reporting is not necessarily a desirable accounting feature for foreign institutional investors. We also find that the interplay between conservative reporting and ownership is significantly different between foreign funds and corporations. The estimated negative relation holds only for foreign funds. Further analysis reveals that foreign funds do not find conservative reporting desirable in low-asymmetric information firms and reduce ownership with greater accounting conservatism in such firms. The analysis sheds significant lights on the relevance of conservative reporting in alleviating the negative consequences of asymmetric information.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1. We do not include individual investors in our analysis since foreign individual investors hold less than 1% of total equity holdings of listed Turkish firms.
2. Van Nieuwerburgh and Veldkamp (Citation2009) suggest that each investor group tend to consolidate their advantageous position by investing in line with their own information set. This in turn increases the information asymmetry between local and foreign investors and motivate each group to invest in different stocks which they are more informed about.
3. It is reported by the World Economic Forum that the countries with the strongest accounting auditing and reporting standards are Finland, Norway, Singapore, New Zealand and Canada with scores above 6 out of 7. Turkey has a score of 4.3 with some of the other emerging countries such as China, South Korea, and Malaysia having scores of 4.5, 4.7, and 5.5 respectively. The data is available from http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/#series=EOSQ097.
4. The lowest and highest free-float capitalization rates of foreign ownership are 62% and 72% in 2011 and 2007 respectively. These numbers are based on our own calculations from the official reports.
5. There is a strand of literature which also acknowledges the relevance of accounting conservatism in determining the value of debt. For example, Cai, Helwege, and Warga (Citation2007) suggest that information-based arguments of conservatism are more relevant to debt financing. In a similar vein, Ball and Shivakumar (Citation2005) state that conditional conservatism increases the contract efficiency by providing additional information to the creditors. In a more recent study, Liu and Magnan (Citation2014) provide evidence on the impact of accounting conservatism on the pricing of newly issued corporate bonds. They find that conservatism results in greater underpricing of newly issued corporate bonds as conservative reporting is perceived as a signal for the informational advantage of insiders over outsiders. Similarly, Liu and Magnan (Citation2016) show that conservative reporting leads to greater yields on corporate bonds.
6. For US, Ahmed and Duellman (Citation2013) and Kravet (Citation2014) report the average value of C_Score as 0.06 and 0.165, respectively. However, Andre et al. report the average value of C_Score as −0.09 for 16 European countries including advanced and emerging markets.
7. For robustness purposes, we also make additional estimations by clustering the standard errors at the firm level. Our main conclusions regarding the impact of accounting conservatism on foreign institutional ownership do not change albeit small differences on the estimated coefficients of control variables. The results are available upon request from the authors.
8. Yearly bid-ask spread is calculated averaging daily bid-ask spreads in a given year where daily bid-ask spread is measured by the ratio of (Ask price-bid price) to (Ask price + bid price)/2.