Import Competition, Myopic Marketing Investment Management, and Long-Term Implications
49 Pages Posted: 6 Jan 2023 Last revised: 2 Nov 2023
Date Written: January 5, 2023
Abstract
Companies frequently engage in earnings management to achieve short term reporting goals. This paper analyzes the effect of Chinese import competition on myopic marketing investment management of US manufacturing firms by leveraging cross-industry variation in import exposure. Rising import exposure increases the prevalence of both myopic marketing and advertising. However, the effects are concentrated on young life cycle firms. This is interpreted as a rise in moral hazard friction. It is also reflected in an increase in myopic R&D investment management. Additionally, import competition causes a decline in the quality of financial reporting. While an increase in myopic marketing may aid firms in achieving short-term objectives, by, for example, mitigating the negative impact on market value, firms lose competitive advantage by exacerbating the negative impact on market power as measured by price-marginal cost markup. This is likely to have long lasting effects.
Keywords: import competition, trade, myopic marketing, myopic advertising, real earning management, markup, reporting quality
JEL Classification: M41, M31, M37, F14, L60, O19, P33
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