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Market Competition, Earnings Management, and Persistence in Accounting Profitability around the World

Review of Accounting Studies, Volume 19, Issue 4, pp 1281-1308, December 2014

38 Pages Posted: 21 Jun 2011 Last revised: 1 Feb 2017

Paul M. Healy

Harvard Business School; National Bureau of Economic Research (NBER)

George Serafeim

Harvard University - Harvard Business School

Suraj Srinivasan

Harvard Business School

Gwen Yu

Harvard Business School

Date Written: December 1, 2014

Abstract

We examine how cross-country differences in product, capital, and labor market competition, and earnings management affect mean reversion in accounting return on assets. Using a sample of 48,465 unique firms from 49 countries, we find that accounting returns mean revert faster in countries where there is more product and capital market competition, as predicted by economic theory. Country differences in labor market competition and earnings management are also related to mean reversion in accounting returns - but the relation varies with firm performance. Country labor competition increases mean reversion when unexpected returns are positive, but dampens it when unexpected returns are negative. Accounting returns in countries with higher earnings management mean revert more slowly for profitable firms and more rapidly for loss firms. Thus, earnings management incentives to slow or speed up mean reversion in accounting returns are accentuated in countries where there is a high propensity for earnings management. Overall, these findings suggest that country factors explain mean reversion in accounting returns and are therefore relevant for firm valuation.

Keywords: market competition, Performance persistence, Cross-country differences, Financial statement analysis

JEL Classification: G38, M41, E17

Suggested Citation

Healy, Paul M. and Serafeim, George and Srinivasan, Suraj and Yu, Gwen, Market Competition, Earnings Management, and Persistence in Accounting Profitability around the World (December 1, 2014). Review of Accounting Studies, Volume 19, Issue 4, pp 1281-1308, December 2014. Available at SSRN: https://ssrn.com/abstract=1865878 or http://dx.doi.org/10.2139/ssrn.1865878

Paul M. Healy

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-1283 (Phone)
617-496-7387 (Fax)

George Serafeim (Contact Author)

Harvard University - Harvard Business School ( email )

381 Morgan Hall
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=15705

Suraj Srinivasan

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=10700

Gwen Yu

Harvard Business School ( email )

Soldiers Field Road
Morgan 383
Boston, MA 02163
United States

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