Window Dressing or Transparency? The Impact of Cross-Listing on Earnings Management in Korean Firms

This study investigates the relationship between cross-listing and earnings management among Korean firms. To mitigate endogeneity concerns associated with the cross-listing decision, I construct a matched sample of firms that undertook cross-listing (cross-listed firms) and those that did not (non-cross-listed firms) using Propensity-Score Matching (PSM) technique. Employing a Difference- in-Differences (DiD) framework, I compare the extent of earnings management—discretionary accruals used as the proxy variable—as well as key financial performance indicators across the two groups. The empirical results reveal that cross-listed firms engaged in significantly higher levels of earnings management prior to cross-listing relative to their non-cross-listed counterparts. This behavior suggests the presence of “window-dressing” aimed at meeting the listing criteria or signaling firm quality to foreign investors. Furthermore, I find that cross-listed firms experienced subsequent increases in indicators associated with growth potential and investment efficiency, such as Tobin's Q and R & D intensity, pointing to the long-term strategic benefits of cross-listing. However, these firms also exhibited a relative decline in profitability after cross-listing, which may reflect the reversal of pre-listing earnings manipulation or the financial strain associated with maintaining dual listings. Overall, I suggest that while cross-listing can enhance firms' visibility and access to capital, it may also incentivize short-term earnings management in the pursuit of meeting external listing standards. The empirical results underscore the dual-edged nature of cross-listing, where improved market discipline and governance coexist with managerial incentives to temporarily inflate performance.