Earnings Management During Import Relief Investigations

This study tests whether firms that would benefit from import relief (e.g., tariff increases and quota reductions) attempt to decrease earnings through earnings management during import relief investigations by the United States International Trade Commission (ITC). The import relief determination made by the ITC is based on several factors that are specified in the federal trade acts, including the profitability of the industry. Explicit use of accounting numbers in import relief regulation provides incentives for managers to manage earnings in order to increase the likelihood of obtaining import relief and/or increase the amount of relief granted. While studies of earnings management typically examine situations in which all contracting parties have incentives to perfectly monitor (adjust) accounting numbers for such manipulation, import relief investigations provide a specific motive for earnings management that is not