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 after tariff reductions that intensify foreign competition. By showing that affected firms engage in greater earnings management, we find evidence of a “dark side” to competition and unintended consequences of trade liberalization. We further document that the effect of tariff reductions on earnings management is more pronounced for firms operating in industries that are more competitive before the tariff reductions (and therefore subject to greater predation risk), for firms that are subject to tighter financial constraints (which inhibit their “real” response to foreign competition), for firms with greater financing needs (which motivate the incumbent firms to manipulate investors’ beliefs), and for firms 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
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[2014년 제 4차] Does Competition Affect Earnings Management? Eviden
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2014-12-12