Does the presence of foreign investors affect financial reporting quality in Philippine publicly listed firms?

• Main Authors: Cabiltes, Natasha Amber Y., Beltran, Megan Justine S., Benito, John Miguel Roger D.C., Agaton, Gianna Zenovia D.
• Format: text
• Language: English
• Published: Animo Repository 2023
• Subjects: Investments, Foreign—Philippines; Accounting—Philippines; Economics
• Online Access: https://animorepository.dlsu.edu.ph/etdb_econ/52; https://animorepository.dlsu.edu.ph/cgi/viewcontent.cgi?article=1065&context=etdb_econ
• Institution: De La Salle University

Philippine foreign ownership laws have recently been amended in favor of foreign investors to attract more foreign capital. However, foreign investors may hesitate to invest in the Philippines due to the rampant information asymmetry caused by weak corporate governance and compliance-driven disclosures that are impractical for making investment decisions (Asian Development Bank, 2019; Ferreira et al., 2017; Khalil et al., 2020). Therefore, foreign investors demand for more high-quality financial reporting. Accounting conservatism plays a crucial role in providing this due to its tendency to require more stringent verification when recognizing economic gains over losses (Watts, 2003a). In this study, we aim to investigate the relationship between foreign investor presence and accounting conservatism using an unbalanced panel dataset of publicly listed non-financial firms in the Philippine Stock Exchange (PSE) from 2010 to 2019 using standard panel regression. This paper accounts for the multiple dimensions of foreign investor presence such as foreign ownership, substantial foreign ownership, and foreign shareholder board representation. To test for robustness of results, we use Khan and Watts (2009) and Ball and Shivakumar (2005) as alternative measures of accounting conservatism. We find a significant and positive relationship between foreign investor presence and accounting conservatism but only when using the Ball and Shivakumar (2005) measure and when foreign investor presence is proxied by the presence of substantial foreign ownership over 50% and foreign shareholder board representation. Our results imply two things: (1) the presence of substantial foreign ownership over 50% results in a higher degree of accounting conservatism; and (2) higher degrees of foreign shareholder board representation results in increases in the demand for conservative reporting. In conclusion, our results suggest that the presence of foreign directors representing foreign investors in Philippine corporate boards and the presence of foreign majority shareholders in Philippine firms may be the main drivers to encourage companies to improve transparency, lessen information asymmetry, and prevent managers’ opportunistic behaviors by demanding for more conservative reporting, which in turn increases the quality of financial reporting.