Financial Misconduct and Import Penetration

This paper examines the impact of financial misconduct announcements on import penetration. We find that industry-level import penetration increases significantly following such announcements by regulators. The effects are more pronounced in industries with higher profit margins or lower competition, and in countries geographically closer to the U.S. or with stricter financial disclosure regulations. We then examine firm-level data and observe that foreign firms are more likely to export into an industry after regulators announce a financial misconduct enforcement action against a U.S. firm. Additionally, the import volumes from these foreign firms rise significantly. The effects are stronger for foreign firms that are better positioned to exploit the product market opportunities created by domestic accounting fraud. Our study provides new insights into how financial misconduct can shift the competitive dynamics between domestic and foreign firms in domestic product markets.