Does Competition Affect Earnings Management? Evidence from a Natural Experiment

59 Pages Posted: 21 Nov 2013 Last revised: 8 Dec 2016

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Micah S. Officer

Loyola Marymount University - Department of Finance

Xintong Zhan

Department of Finance, School of Management, Fudan University

Date Written: September 23, 2015

Abstract

We examine how exogenous increases in foreign competition affect firms’ earnings management behavior, using import tariff reductions as a natural experiment. Using a Difference-in-Differences framework, we find a significant increase in earnings management (and financial restatements) after tariff reductions that intensify foreign competition. The effect of tariff reductions on earnings management is more pronounced for firms operating in industries that are more competitive, subject to tighter financial constraints, with greater financing needs, and subject to weaker external monitoring. Our findings are consistent with Shleifer (2004), who argues that competition might induce more unethical behavior (such as earnings management).

Keywords: earnings management, foreign competition, trade liberalization

JEL Classification: G15, G31, G38

Suggested Citation

Lin, Chen and Officer, Micah S. and Zhan, Xintong, Does Competition Affect Earnings Management? Evidence from a Natural Experiment (September 23, 2015). Available at SSRN: https://ssrn.com/abstract=2357783 or http://dx.doi.org/10.2139/ssrn.2357783

Chen Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Micah S. Officer

Loyola Marymount University - Department of Finance ( email )

Los Angeles, CA 90045
United States

Xintong Zhan

Department of Finance, School of Management, Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

HOME PAGE: http://sites.google.com/view/xintongzhan

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