Relationship-Specificity and Real Activities Manipulation

• In Event: Earnings Management across Industry Sectors

Abstract

In this study, I examine the effect of product market relationships on firms’ real activities manipulation (RAM). I find that, with the exception of RAM through sales manipulation, the importance of relationship-specific investments by suppliers is negatively associated with firms’ aggressive operating decisions. This finding is consistent with the attempt by firms that operate in industries with a great need for relationship-specific investments to avoid RAM in order to induce their suppliers to undertake such investments. I also find that the association between relationship-specificity and RAM is less pronounced for firms that have a greater market share but more pronounced for firms that are relatively young, consistent with the notion that a firm is more likely to be under pressure from its suppliers to reduce RAM when it has less competitive advantages. Overall, my results suggest the important role that product market relationships play in influencing managers’ aggressive operating decisions.

Author

• KoEun Park, University of Massachusetts-Boston