Does Competition Affect Earnings Management? Evidence from a Natural Experiment
59 Pages Posted: 21 Nov 2013 Last revised: 8 Dec 2016
Date Written: September 23, 2015
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: Suggested Citation