Product Market Competition and Earnings Quality: A Non-Linear Relationship

• In Event: Earnings Quality, Earnings Management, and Accruals

Abstract

The economic literature shows that production market competition could have nonlinear effects on corporate behaviors, such as management effort and innovative activities. We extend the literature by focusing on the influence of product market competition on financial reporting. We propose that earnings quality increases with product market competition up to a certain level of competition, and then decreases with competition. The empirical results support such an inverted U-shape relation between earnings quality and product market competition. The results are robust to various measures of earnings quality, competition, and alternative model specifications.

Authors

• Yanhua Sunny Yang, university of connecticut

• Boo Chun Jung, University of Hawaii-Manoa

• Woo-Jong Lee, Hong Kong Polytechnic University