Conservative Reporting and Product Market Competition

29 Pages Posted: 22 Jan 2012

See all articles by Qiang Guo

Qiang Guo

University of Mannheim - Graduate School of Economic and Social Sciences

Qiang Guo

University of Southern Denmark - Department of Business and Economics

Abstract

Competing firms are affected by financial reporting mainly through revealing relevant information. As suggested by recent literature (Bagnoli, et al. 2010), the biased disclosure has impact on the firms’ competitive position in a product market setting. So when such information is distorted by regulated bias such as conservative reporting policy, it comes into question whether it affects the outcome of product market competition. The paper investigates the effect of such distortion on the output and profits of firms that competing in a product market. And besides incumbent firms competing in a Cournot fashion, the setting also allows an entry game where the disclosed information might induce a potential entrant. Through this setting the interaction between product market competition and conservative bias is studied. The results show that when potential entry is not considered and competing firms precommit to such accounting reporting system, firms would benefit from reporting conservatively by obtaining higher output, and there is an optimal level of conservatism to maximize the expected profit in the duopoly setting however it depends on the information quality of the signal. When in the presence of a potential entrant, a more conservative reporting system would not necessarily benefit the incumbent firms although the potential entrant would benefit from a less conservative reporting system.

Keywords: Accounting bias,conservative reporting, product market competition

JEL Classification: L1, M41

Suggested Citation

Guo, Qiang and Guo, Qiang, Conservative Reporting and Product Market Competition. CAAA Annual Conference 2012. Available at SSRN: https://ssrn.com/abstract=1985758 or http://dx.doi.org/10.2139/ssrn.1985758

Qiang Guo (Contact Author)

University of Mannheim - Graduate School of Economic and Social Sciences ( email )

Qiang Guo

University of Southern Denmark - Department of Business and Economics ( email )

Campusvej 55
DK-5230 Odense, 5230
Denmark

Register to save articles to
your library

Register

Paper statistics

Downloads
240
Abstract Views
1,589
rank
125,225
PlumX Metrics