Industry Product Market Competition and the Disclosure of Alternative Performance Measures

• In Event: Governance and managerial Issues: International Evidence
  In Paper Session: Governance and Managerial Issues: International Evidence

Abstract

We investigate the association between product market competition and the disclosure of alternative performance measures. Complementarily, we assess how the quality of corporate governance practices impacts this association. Managers frequently create alternative performance measures by making adjustments to accounting earnings, and then disclose them in earnings announcements press releases. The lack of strict regulation in Europe and the voluntary nature of these disclosures give European managers considerable discretion to make adjustments that are potentially misleading about firm performance. Our sample includes the largest European firms and covers fiscal years 2003-2009. We find that a high level of competition is associated with higher manager adjustments, suggesting that competitive pressure leads managers to disclose figures which portray firms’ performance optimistically. However, when the interaction of competition and corporate governance is considered, we find this is associated with lower adjustments. This suggests that in environments where product market competition is high strong internal governance mechanisms can curb aggressive reporting of alternative performance measures.

Authors

• Helena Isidro, Instituto Universitário de Lisboa (ISCTE-IUL)

• Ana Cristina Marques, Nova School of Business and Economics