Competition Laws and Earnings Management: International Evidence

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.