Abstract:
The general aim of this thesis is to examine whether a change in trade policy that significantly increases the interaction of domestic firms with a foreign product market can affect the financial reporting quality of those domestic firms. I focus on Chile, where the US– Chile Free Trade Agreement (FTA) came into effect on January 1, 2004. The FTA resulted in significant increases in US exports and imports for Chilean companies. The hand-collected sample consists of Chilean firms for the period 2002–2008 and earnings quality is measured by discretionary accruals and meeting or beating earnings benchmarks. Proxies for product market interaction are the change in Chilean exports to the US, being a member of an industry sector identified by the Chilean government as a likely beneficiary of the FTA, and having a subsidiary in the US. Specifically, I examine the pre-/post-FTA changes in earnings quality for Chilean firms most affected by the FTA. Results indicate that the FTA led to improvements in accounting quality, particularly for those Chilean companies that have the largest increases in interaction with the US product market. As hypothesised, the establishment of a trade agreement positively affects the financial reporting quality of firms in the country that has lower accounting quality and weaker institutions. Additionally, I analyse whether the change in earnings quality around the FTA is affected by ownership structure. I include family businesses and institutional investors because they dominate the Chilean economy. In general, the findings show some evidence that family and institutional ownership influence the change in earnings quality due to the FTA; however, the results are not consistent.
