Earnings Management and Government Restrictions on Outward Foreign Direct Investment : evidence from Taiwanese firms

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)41–67
Journal / PublicationReview of Quantitative Finance and Accounting
Issue number1
Online published22 Aug 2013
Publication statusPublished - Jan 2015


This study examines whether firms engage in earnings management to overcome government policies on limiting outward foreign direct investment (FDI), and whether their earnings-management behavior is aligned with shareholders’ interests. Using the regulatory setting in Taiwan, where the government has placed a cap on FDI in China for listed firms, we find that firms with FDI ratios near the limit (near-limit firms) are more likely to engage in income-increasing earnings management to shore up their shareholders’ equity, thus reducing their propensity to breach government policy. In addition, near-limit Taiwanese firms engaged in income-increasing earnings management show greater increases in FDI in China and better performance in the years following their earnings-management activities. We also find that the positive effects of earnings management on the future performance of these firms are driven by incremental FDI in China. The effects are more pronounced in firms with strong corporate governance. The results suggest that when the government’s restrictions on outward FDI are inconsistent with an individual firm’s objective of maximizing shareholder value, managers are motivated to use earnings-management strategies to circumvent governmental constraints on outward FDI.

Research Area(s)

  • Foreign direct investment, Foreign direct investment policy, Earnings management, Regulatory restriction

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