The Market Valuation of Managed Earnings in a Regulatory Setting With Learning Opportunities

Abstract

This dissertation examines the market valuation of earnings announced by U.S. firms initiating or reinitiating antidumping trade investigations against foreign exporters. Trade investigations are an interesting setting because firms petitioning the trade regulator for import relief face strong incentives to manage earnings to increase the likelihood and magnitude of import relief. In addition, the setting allows an examination of opportunities for investors to learn about earnings management because (1) investigation initiation dates and determinations are in the public domain and (2) some firms initiate investigations more than once. Import relief firms’ diverse investor base further enriches the research setting and allows for a study of investor learning by both more and less sophisticated investors. Using cross-sectional, time-series and size-matched samples and a valuation model that relates stock prices to accounting book values and earnings, I find an attenuated price-earnings relation for antidumping investigation-initiating firms only in the presence of an opportunity to learn and primarily when the firm has higher levels of following by sophisticated investors. That is, the price-earnings relation in the valuation model is attenuated only when firms with sophisticated shareholders initiate their second or subsequent antidumping investigation. This dissertation contributes to the accounting literature by shedding light on which market participants learn to identify firms’ incentives to engage in earnings management.