Oligopoly, Disclosure and Earnings Management

27 Pages Posted: 14 Oct 2007

Multiple version iconThere are 2 versions of this paper

Date Written: October 2007

Abstract

We examine how biased financial reports (managed earnings) affect how firms compete in the product market and how product market competition affects incentives to bias reported earnings. We find that Cournot competitors bias their financial reports so as to create the impression that their costs of production are lower than they actually are. This bias leads to lower total production, a higher price and each competitor earning greater product market profits. These results obtain even though no firm is fooled by its rival's disclosure. We also find that the magnitude of the bias (the amount of earnings management) is larger when firms compete in more profitable product markets but smaller when they can extract more information about their rival's costs from their own. When the costs of misreporting are asymmetric, the lower cost firm engages in more earnings management than its rival, and it produces more and earns greater profits than it would in a full-information environment. Our analysis also offers new, testable implications for the relationship between earnings management, reported and actual earnings and industry structure.

Keywords: earnings management, bias, reporting bias, competition, information asymmetry, earnings, disclosure, oligopoly, information sharing

JEL Classification: G10, G14, M41, M43

Suggested Citation

Bagnoli, Mark E. and Watts, Susan G., Oligopoly, Disclosure and Earnings Management (October 2007). Available at SSRN: https://ssrn.com/abstract=1020957 or http://dx.doi.org/10.2139/ssrn.1020957

Mark E. Bagnoli

Purdue University ( email )

Department of Accounting
West Lafayette, IN 47907-1310
United States
765-494-4484 (Phone)
765-496-1778 (Fax)

Susan G. Watts (Contact Author)

Purdue University ( email )

West Lafayette, IN 47906
United States

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