Institutional Quality and Dark Side of Product Market Competition: A Cross-Country Study

28 Pages Posted: 11 Aug 2023

See all articles by Yuan Huang

Yuan Huang

Hong Kong Polytechnic University - School of Accounting and Finance

Zilong Song

School of Accounting,Nanjing University of Finance and Economics

Lewis Tam

Faculty of Business Administration, University of Macau

Date Written: June 1, 2022

Abstract

Purpose
The authors examine the joint effect of the country-wide legal institutions and product market competition on stock crash risk in a large sample of international firms.

Design/methodology/approach
In the study, the authors examine whether the country-level institutional factors affect product market competition's impact on stock crash risk. Specifically, the authors characterize country-wide institutional quality with individual governance indices developed in earlier studies and also adopt the worldwide board reforms as a proxy for the change in firms' governance environment.

Findings
The authors find that strong institutions mitigate the positive relationship between product market competition and stock crash risk in the international setting. In addition, the authors find that institutional quality moderates the effect of product market competition on stock crash risk via the information channel, i.e. although firms in competitive industries manage and report earnings more aggressively, strong institutions or board reforms, curtail managers' incentive to do so.

Originality/value
The authors’ findings lend support to the dark side of product market competition with a broader sample from 35 countries. In light of this, when earlier studies consider firms from competitive (concentrated) industries as having less (more) severe agency problems, future studies should consider the agency costs associated with product market competition for both the US firms and non-US firms. Furthermore, when it is debatable that regulators are self-interested, captured, uninformed and thus the regulations and institutions may not be fully effective as a result, this study demonstrates the effectiveness of institutions in ex ante mitigating agency conflicts associated with product market competition.

Keywords: Product market competition, Stock crash risk, Information disclosure, Institutional quality

JEL Classification: G32, K22, M48

Suggested Citation

Huang, Yuan and Song, Zilong and Tam, Lewis, Institutional Quality and Dark Side of Product Market Competition: A Cross-Country Study (June 1, 2022). China Accounting & Finance Review, Vol. 24, No. 2, 2022, Available at SSRN: https://ssrn.com/abstract=4514722

Yuan Huang (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Zilong Song

School of Accounting,Nanjing University of Finance and Economics ( email )

Nanjing
China
13098807564 (Phone)

Lewis Tam

Faculty of Business Administration, University of Macau ( email )

Room E22-4055, University of Macau
Avenida da Universidade
Taipa
Macau

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