Product Market Competition and Earnings Management: Evidence from Discretionary Accruals and Real Activity Manipulation

• In Event: Financial Accounting and Reporting II

Abstract

We examine the association between product market competition and earnings management activities. We use the Herfindahl-Hirchman Index (HHI), a widely used measure for market concentration, as a proxy for product market competition. We examine two forms of earnings management: accrual-based and real activity-based. Our results suggest that both accrual-based and real activity-based manipulations are more prevalent among firms in low competition industries than those in high competition industries. Our findings are robust to various measures of earnings management, alternative measures of product market competitions, and industry subsamples. We further explore the reasons why firms in low competition industries are more inclined to managing earnings and find that the market consequences of missing important earnings targets are more severe among firms in low competition industries than those in high competition industries.

Authors

• Indrarini Laksmana, Kent State University

• Ya-wen Yang, Wake Forest University