Avoiding the risk of de-legitimation: Impact of internationalization on earnings management of emerging market firms

Abstract

This study examines the impact of internationalization on the corporate misconduct of earnings management by emerging market multinational enterprises. We propose that internationalization exposes these firms to heightened scrutiny by meta-institutional field and host country stakeholders, and EMNEs reduce earnings manipulation to avoid de-legitimation in the minds of host-nations’ stakeholders. We find empirical evidence for our predictions on a multi-industry sample of 21,477 firm-year observations belonging to 2,461 Indian firms during 2005 – 2018. Additionally, we find that internationalization induced 'external monitoring' plays a substitutive role for the 'internal monitoring' mechanisms of corporate governance on earnings management.