The effect of Product Market Competition on Discretionary Mmanagement Forecasts

• In Event: Accounting Issues in Japan

Abstract

We examine the effect of product market competition on the extent of discretionary forecasts management in Japanese firms. Based on the theoretical studies on managerial incentive, we predict that higher product market competition induces manager to conduct opportunistic accounting behaviors concerning their initial earnings forecasts. We find that firms experiencing higher market competition tend to report higher earnings forecasts through discretionary forecasts management. We also reveal that such firms are more likely to manage their forecasts in order to meet or beat forecast innovations benchmark. These results are consistent with our hypothesis. We suppose this is because forecasts management has favorable features for Japanese managers in terms of the costs of carrying it out including strong managerial incentive, no restriction on the continuous use, less perceivable and more difficult to detect, and smaller litigation costs.

Authors

• Takuya Iwasaki, Kansai University

• Norio Kitagawa, Kobe University

• Akinobu Shuto, Kobe University