Ex Ante Competitive Threats and Stock Price Crash Risk : Evidence from Antitrust Leniency Programs

We examine empirically the impact of ex ante competitive threats from potential foreign rivals on bad news hoarding/disclosure decisions. We find that stronger antitrust enforcement around the world causes domestic U.S. firms to exhibit lower levels of stock price crash risk. This is consistent with managers disclosing rather than hoarding bad news in order to deter entry from potential foreign rivals. Our findings are robust to a battery of sensitivity tests including temporal dynamics test, and staggered DiD bias correction methods. Further, cross-sectional analyses show that the negative impact of competitive threats from potential rivals on stock price crash risk is more salient for firms with severe agency problems measured by external market forces, corporate risk-taking and information asymmetry. Overall, our evidence indicates that competitive threats from potential foreign rivals constrains firms’ stock price crash risk, in line with the view that competition serves as an important governance mechanism in curbing agency problems