Employee Tenure, Earnings Management, and the Moderating Role of Foreign Investors: Evidence from South Korea

This study examines the influence of employee tenure on earnings management and the moderating role of foreign investors in Korean listed firms. Drawing on agency theory and entrenchment perspectives, we argue that longer employee tenure, while fostering stability and firm-specific expertise, can entrench practices that enable opportunistic reporting. In contrast, consistent with resource dependence theory, foreign investors act as effective external monitors who can mitigate such behavior, particularly in emerging markets with weaker governance institutions. Using 11,381 firm-year observations from 2011 to 2019, we estimate discretionary accruals with the modified Jones model and performance-matched model. The results indicate that employee tenure is positively associated with accrual-based earnings management, but this effect is significantly reduced in firms with higher foreign investor ownership. Robustness tests, including instrumental variable estimation, confirm the validity of these findings. This study’s main contributions are introducing employee tenure as an underexplored governance factor, integrating internal and external monitoring perspectives, and showing that foreign investors moderate workforce-related risks. Practically, it highlights that investors can use tenure as a reporting risk signal, managers should complement workforce stability with strong governance, and policymakers should promote tenure disclosure and foreign participation to enhance transparency.