Product Market Competition and Financial Accounting Misreporting

Abstract:     
We show that, on average, the level of product market competition acts as a disciplining force constraining managers from misreporting accounting information. Further, in a quasi-natural experiment that uses shifts in import tariffs to identify exogenous intensification of competition, difference-in-difference estimations support the causal nature of the disciplining effect of competition on misreporting. Moreover, we find that the relation is stronger in industries with higher levels of financial statement comparability. Our findings are robust across alternate measures of misreporting including restatements and accounting irregularities as well as to measures of product market competition including those based on the U.S. Census.

Number of Pages in PDF File: 59

Keywords: Product Market Competition, Disclosure, Financial Reporting Quality, Earnings Restatements, Tariffs

JEL Classification: D4, G34, L1, M40, M41

working papers series