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Trade liberalization and conditional accounting conservatism: evidence from import competition

Author

Listed:
  • Qing L. Burke

    () (Miami University)

  • Tim V. Eaton

    () (Miami University)

  • Mengying Wang

    () (University of Massachusetts Boston)

Abstract

This study examines the impact of import competition, an underexplored but integral component of trade liberalization, on conditional accounting conservatism. Existing literature offers conflicting arguments on the effect of import competition on conditional conservatism. Import competition may reduce the need for conditional conservatism through the disciplining role of competition in corporate governance. Conversely, faced with heightened import competition, firms may have greater business uncertainty and become more susceptible to agency costs, thus generating a higher demand for conditional conservatism from shareholders and creditors. Using a sample of manufacturing firm-years from 1977 to 2012, we find that firm-level import competition is significantly and positively associated with conditional conservatism. Moreover, we establish the causal effect of import competition on conditional conservatism by estimating instrumental variable regressions and employing a difference-in-differences specification of large tariff reductions. Our results are robust when further controlling for other proxies of product market competition. These findings contribute to the literature on competition and enhance our understanding of the impact of trade liberalization on financial reporting.

Suggested Citation

  • Qing L. Burke & Tim V. Eaton & Mengying Wang, 2019. "Trade liberalization and conditional accounting conservatism: evidence from import competition," Review of Quantitative Finance and Accounting, Springer, vol. 53(3), pages 811-844, October.
  • Handle: RePEc:kap:rqfnac:v:53:y:2019:i:3:d:10.1007_s11156-018-0767-9
    DOI: 10.1007/s11156-018-0767-9
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    Keywords

    Trade liberalization; Import penetration; Competition; Conditional conservatism;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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