This paper examines earnings management by EU firms that initiate an antidumping investigation. We first document economically and statistically significant income-decreasing earnings management around the initiation of an antidumping investigation. We show that earnings management increases when accounting data directly affect the magnitude of the tariffs imposed in the trade investigation. We also find that earnings management decreases as the number of petitioning firms increases or as the distance between petitioning firms increases, suggesting free-rider and coordination problems. We find that earnings management increases when the petition is directed at a country that imports more goods from the petitioning firm's home country, suggesting that retaliation threats affect incentives. We document that raising equity or debt financing moderates income-decreasing earnings management, consistent with the idea that sample firms trade off capital market and regulatory considerations. Our results indicate that contemporary research methods can detect accruals-based earnings management in settings in which the incentives for earnings management can be clearly identified.

ABSTRACT This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership‐control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual‐class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.