The effects of legal protections and control‐ownership divergences on investor perceptions of foreign earnings

Abstract

Purpose

The purpose of this paper is to investigate the impact of corporate internationalization, governance structures, and legal protections on the foreign earnings response coefficient (FERC). The FERC is a measure of the value‐relevance of foreign earnings.

Design/methodology/approach

Data were collected on 3,653 Taiwanese firms which had overseas investments. The authors examined the impact of the site of their overseas investments and the nature of the legal code of the investee country on the investor perceptions of firms' reported foreign and domestically‐generated earnings. Also examined was the impact of corporate governance arrangements (e.g. the difference between the owners' cash flow and voting rights) on the same components of the firms' earnings.

Findings

The empirical findings suggest that an aggressive internationalization strategy (foreign direct investment) has positive effects on the value relevance of foreign earnings, but that this strategy is impacted by the firm's own corporate governance arrangements and the target of its overseas investment efforts. While foreign investments bring about growth and profits, they expose the investors to the risk of expropriation by investee countries and corporate insiders.

Originality/value

The importance of the findings is that they should help regulatory agencies – and firms themselves – to better understand factors that can promote the global expansion of domestic enterprises.

Citation

Chin, C., Chen, Y., Kleinman, G. and Lee, P. (2013), "The effects of legal protections and control‐ownership divergences on investor perceptions of foreign earnings", Journal of Financial Regulation and Compliance, Vol. 21 No. 2, pp. 164-187. https://doi.org/10.1108/13581981311315668