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the operation of capital market. Hence, the role of QFIIs has garnered a great deal of
attention from practitioners, researchers, and regulators in Taiwan’s capital market. Stulz
(1999) predicts that foreign institutional investors can play a special role in corporate
monitoring in the presence of large shareholders’ expropriation. This is because large
shareholders can potentially use their influence on managerial earnings reporting to pursue
exclusive benefits. However, it is possible that QFIIs may play an opportunistic or a trading
role in firm’s earnings reporting because they are unfamiliar with the target stocks market
and use short-term oriented trading strategies. Thus, this study is motivated to use Tucker
and Zarowin’s (2006) model as a framework in discriminating the informative component of
earnings, and examines the role of QFIIs in earnings informativeness for firms with income
smoothing in Taiwan. Moreover, because the regulations for QFIIs were loosened in 2003 in
Taiwan, this study further examines whether the role of QFIIs in earnings informativeness
for firms with income smoothing has changed since the deregulation of QFIIs’ ownership
restrictions.
Based on the unbalanced-panel data, the empirical results reveal that high QFIIs’
ownership weakens the informativeness of earnings for firms with income smoothing. When
incorporating the QFIIs’ shareholdings volatility into consideration, the result is sensitive to
the high QFIIs’ ownership with high shareholdings volatility case. This result suggests that
QFIIs with a short-term oriented trading strategy reveals the opportunistic earnings
component for firms with income smoothing. This finding supports the opportunism
hypothesis of QFIIs’ behavior, yet, is explicitly conditional on QFIIs’ shareholdings volatility
which to some extent is related to their short-term oriented trading strategy. Further
examination documents that the opportunistic role of QFIIs is only supported in the post-
deregulation subperiod. It suggests that the deregulation of QFIIs accelerates the
opportunistic role of QFIIs in a firm’s strategic income smoothing decision, which in turn,
reduces the earnings informativeness. This study demonstrates some diagnostic checks and
provides evidence that the results are robust to the various specifications.
To the best of our knowledge, this is the first article that focuses on examining the role
of QFIIs on the informativeness of earnings for firms with income smoothing. According to
the firm-level QFIIs’ ownership data, this study extends the very limited research on the
association between QFIIs’ behavior and managerial income smoothing decision in the
emerging markets. In particular, incorporating the deregulation of QFIIs into the empirical
model to examine the informativeness of earnings provides some insights on income
smoothing research from the regulating perspective. Besides, reporting behavior may differ