Earnings Management In European Firms: Evidence When Incentives Are Predictable

• In Event: Earnings Management: International Evidence I

Abstract

This paper examines earnings management in European Union (EU) firms that initiate an anti-dumping trade investigation against foreign exporters that allegedly dump goods into the EU. This setting allows us to identify a period of time in which we know when, and how, firms are incented to engage in earnings management. We first document that sample wide earnings management around the initiation of an anti-dumping investigation follows exactly the pattern one would expect if firms wanted to increase the likelihood of receiving trade remedy and increase the economic magnitude of that relief. We also document a number of interesting cross-sectional patterns in this earnings management activity. First, we find that earnings management is concentrated in private firms rather than public firms. Second, we document raising equity or debt financing during the anti-dumping investigation moderates the downward earnings management during the injury determination years. This is consistent with the idea that sample firms have to trade off capital market considerations with regulatory considerations when making earnings management decisions. Third, in contrast with some of the prior literature, we show that earnings management is more pronounced in countries with better legal enforcement or regulatory quality. Finally, we show that earnings management is more pronounced in those cases where the petitioning firms’ accounting data directly affect the magnitude of the tariffs imposed in the trade investigation.  

Authors

• David Godsell, Queen's University, Kingston

• Michael Welker, Queen's University, Kingston

• Ning Zhang, Queen's University