Competition, Capital Market Feedback, and Earnings Management: Evidence from Economic Deregulation

51 Pages Posted: 5 Nov 2013 Last revised: 8 Aug 2016

See all articles by Jongsub Lee

Jongsub Lee

University of Florida - Warrington College of Business Administration

Xiaoding Liu

Texas A&M University - Department of Finance

Date Written: August 7, 2016

Abstract

Using economic deregulation as a quasi-natural experiment for increasing product market competition, we find increases in earnings manipulation and accounting frauds following deregulation. This “dark-side” of product market competition is particularly evident for deregulated firms in high market-to-book industries, where we find evidence of short-termism in the capital market. We further find that firms in these industries, if actively manage earnings, tend to make more acquisitions and have higher survival rates. Overall, our results are largely consistent with Shleifer (2004), who predicts an important interplay between product market competition and capital market valuation feedback that could induce misbehaving incentives among firms in competitive industries.

Keywords: Product market competition, economic deregulation, earnings manipulation, corporate fraud, shareholder short-termism, firm survival

JEL Classification: G34, G38

Suggested Citation

Lee, Jongsub and Liu, Xiaoding, Competition, Capital Market Feedback, and Earnings Management: Evidence from Economic Deregulation (August 7, 2016). Available at SSRN: https://ssrn.com/abstract=2348294 or http://dx.doi.org/10.2139/ssrn.2348294

Jongsub Lee (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Department of Finance Insurance & Real Estate
P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-273-4966 (Phone)
352-392-0301 (Fax)

Xiaoding Liu

Texas A&M University - Department of Finance ( email )

Texas A&M University
College Station, TX 77843
United States

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