Earnings management during antidumping investigations: Analysis and implications

In Canada, antidumping complaints against foreign competitors must be lodge d with the Canadian External Trade Tribunal. The tribunal assesses if forei gn competition is harming domestic producers by considering many factors, s uch as the plaintiff's financial condition reflected in its financial state ments. Hence, to obtain a favourable decision from the tribunal, managers o f Canadian firms who have launched antidumping complaints have an incentive to voluntarily reduce reported earnings during the investigation period, i .e., to engage in earnings management. Results indicate that Canadian firms reduce their reported earnings by a si gnificant amount (6.3% of lagged assets) during the year in which they are under investigation by the tribunal, even after controlling for variables s uch as firm performance that may affect reported earnings. Moreover; it wou ld appear that stock market investors see through earnings management and r e-adjust the relationship between reported earnings and firm valuation in t he year earnings are subject to external investigations by the tribunal. Po licy implications from these findings are discussed.