Competition Laws and Earnings Management: International Evidence

Posted: 18 Feb 2021 Last revised: 7 Apr 2021

See all articles by Tao Chen

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance

Jimmy Chengyuan Qu

Nanyang Business School, Nanyang Technological University

Date Written: October 28, 2020

Abstract

Based on a comprehensive dataset on competition laws around the world, we examine the impact of competition laws on firms’ earnings management. In a cross-country examination using data from 58 countries, we find that firms tend to inflate their earnings when their countries adopt stricter competition laws, which supports the pressure effect of product market competition. This impact of competition laws is weaker for firms with a lower level of financial constraint, more investment opportunities, higher institutional ownership, or cross-listing, and stronger for firms in countries without IFRS adoption, with higher political uncertainty, or with less investor protection. Evidence from accounting figures further confirms the positive impact of competition laws on earnings management. Overall, our results shed light on the real effect of competition laws on firms’ earnings management decisions.

Keywords: Earnings management, Competition laws, Pressure effect

JEL Classification: M41, G30, K21, L4

Suggested Citation

Chen, Tao and Qu, Jimmy Chengyuan, Competition Laws and Earnings Management: International Evidence (October 28, 2020). Available at SSRN: https://ssrn.com/abstract=3776211 or http://dx.doi.org/10.2139/ssrn.3776211

Tao Chen (Contact Author)

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1A-08, Nanyang Avenue
Singapore, 639798
Singapore

Jimmy Chengyuan Qu

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

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